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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at SILK Laser Australia (ASX:SLA) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for SILK Laser Australia, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = AU$10m ÷ (AU$179m - AU$39m) (Based on the trailing twelve months to December 2021).
Therefore, SILK Laser Australia has an ROCE of 7.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.
Check out our latest analysis for SILK Laser Australia
Above you can see how the current ROCE for SILK Laser Australia compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The fact that SILK Laser Australia is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 7.2% which is a sight for sore eyes. Not only that, but the company is utilizing 327% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Overall, SILK Laser Australia gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 38% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 4 warning signs facing SILK Laser Australia that you might find interesting.