If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at CEZ Distribution Bulgaria AD (BUL:3CZ) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for CEZ Distribution Bulgaria AD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = лв53m ÷ (лв968m - лв174m) (Based on the trailing twelve months to September 2020).
Thus, CEZ Distribution Bulgaria AD has an ROCE of 6.7%. Even though it's in line with the industry average of 6.6%, 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 CEZ Distribution Bulgaria AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CEZ Distribution Bulgaria AD, check out these free graphs here.
So How Is CEZ Distribution Bulgaria AD's ROCE Trending?
We're delighted to see that CEZ Distribution Bulgaria AD is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.7% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From CEZ Distribution Bulgaria AD's ROCE
Overall, CEZ Distribution Bulgaria AD gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if CEZ Distribution Bulgaria AD can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 1 warning sign facing CEZ Distribution Bulgaria AD that you might find interesting.
While CEZ Distribution Bulgaria AD 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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