If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating Computershare (ASX:CPU), we don’t think it’s current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Computershare:
Return on Capital Employed=Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061=US$302m ÷ (US$6.1b – US$1.2b) (Based on the trailing twelve months to December 2021).
Therefore, Computershare has an ROCE of 6.1%. In absolute terms, that’s a low return and it also under-performs the IT industry average of 8.1%.
View our latest analysis for Computershare
In the above chart we have measured Computershare’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Computershare here for free.
What Does the ROCE Trend For Computershare Tell Us?
When we looked at the ROCE trend at Computershare, we didn’t gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Computershare might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, Computershare is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
One more thing: We’ve identified 2 warning signs with Computershare (at least 1 which is potentially serious) , and understanding them would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.