There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, the ROCE of Globe International (ASX:GLB) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What is it?
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 Globe International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = AU$24m ÷ (AU$107m - AU$49m) (Based on the trailing twelve months to December 2020).
Therefore, Globe International has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Luxury industry average of 8.7%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Globe International's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Globe International is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 70% more capital is being employed now too. So we're very much inspired by what we're seeing at Globe International thanks to its ability to profitably reinvest capital.
Another thing to note, Globe International has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
All in all, it's terrific to see that Globe International is reaping the rewards from prior investments and is growing its capital base. And a remarkable 468% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Globe International can keep these trends up, it could have a bright future ahead.
Like most companies, Globe International does come with some risks, and we've found 2 warning signs that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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