If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Croma Security Solutions Group (LON:CSSG) and its trend of ROCE, we really liked what we saw.
What is 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. The formula for this calculation on Croma Security Solutions Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.085 = UK£1.1m ÷ (UK£21m – UK£7.3m) (Based on the trailing twelve months to December 2019).
So, Croma Security Solutions Group has an ROCE of 8.5%. Even though it’s in line with the industry average of 8.5%, it’s still a low return by itself.
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.
What Can We Tell From Croma Security Solutions Group’s ROCE Trend?
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.5%. The amount of capital employed has increased too, by 43%. So we’re very much inspired by what we’re seeing at Croma Security Solutions Group thanks to its ability to profitably reinvest capital.On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
Our Take On Croma Security Solutions Group’s ROCE
To sum it up, Croma Security Solutions Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 60% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. In light of that, we think it’s worth looking further into this stock because if Croma Security Solutions Group can keep these trends up, it could have a bright future ahead.
On a final note, we’ve found 2 warning signs for Croma Security Solutions Group that we think you should be aware of.
While Croma Security Solutions Group may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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