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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Cannara Biotech (CVE:LOVE) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Cannara Biotech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = CA$8.9m ÷ (CA$149m - CA$27m) (Based on the trailing twelve months to May 2024).
Therefore, Cannara Biotech has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 15%.
Check out our latest analysis for Cannara Biotech
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cannara Biotech's ROCE against it's prior returns. If you're interested in investigating Cannara Biotech's past further, check out this free graph covering Cannara Biotech's past earnings, revenue and cash flow.
So How Is Cannara Biotech's ROCE Trending?
The fact that Cannara Biotech is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 7.3% on its capital. In addition to that, Cannara Biotech is employing 125% more capital than previously which is expected of a company that's 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.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 18% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.