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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So when we looked at Cannara Biotech (CVE:LOVE) and its trend of ROCE, we really liked what we saw.
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 Cannara Biotech, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = CA$7.6m ÷ (CA$155m - CA$27m) (Based on the trailing twelve months to August 2024).
So, Cannara Biotech has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 11%.
See 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.
How Are Returns Trending?
Cannara Biotech has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.0% on its capital. In addition to that, Cannara Biotech is employing 103% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
To the delight of most shareholders, Cannara Biotech has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
One final note, you should learn about the 5 warning signs we've spotted with Cannara Biotech (including 1 which doesn't sit too well with us) .