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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CRA International (NASDAQ:CRAI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on CRA International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$55m ÷ (US$530m - US$182m) (Based on the trailing twelve months to October 2021).
So, CRA International has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 11% it's much better.
View our latest analysis for CRA International
Above you can see how the current ROCE for CRA International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CRA International.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from CRA International. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 52%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From CRA International's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CRA International has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 3 warning signs with CRA International and understanding them should be part of your investment process.