If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Croma Security Solutions Group (LON:CSSG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. Analysts use this formula to calculate it for Croma Security Solutions Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.011 = UK£136k ÷ (UK£18m - UK£5.3m) (Based on the trailing twelve months to June 2020).

Therefore, Croma Security Solutions Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 6.6%.

View our latest analysis for Croma Security Solutions Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Croma Security Solutions Group's ROCE against it's prior returns. If you're interested in investigating Croma Security Solutions Group's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Croma Security Solutions Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 2.4% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Croma Security Solutions Group's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.