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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in SuperCom's (NASDAQ:SPCB) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for SuperCom, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = US$517k ÷ (US$50m - US$6.4m) (Based on the trailing twelve months to June 2024).
Therefore, SuperCom has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.
View our latest analysis for SuperCom
Above you can see how the current ROCE for SuperCom compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SuperCom for free.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that SuperCom has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
One more thing to note, SuperCom has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line On SuperCom's ROCE
In summary, we're delighted to see that SuperCom has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 98% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.