Will The ROCE Trend At Cliq Digital (ETR:CLIQ) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Cliq Digital (ETR:CLIQ) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Cliq Digital, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = €9.4m ÷ (€75m - €12m) (Based on the trailing twelve months to June 2020).

Therefore, Cliq Digital has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Software industry.

View our latest analysis for Cliq Digital

In the above chart we have measured Cliq Digital'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 Cliq Digital here for free.

The Trend Of ROCE

We like the trends that we're seeing from Cliq Digital. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 57% more capital is being employed now too. So we're very much inspired by what we're seeing at Cliq Digital thanks to its ability to profitably reinvest capital.

One more thing to note, Cliq Digital has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Cliq Digital has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that Cliq Digital can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 759% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Cliq Digital can keep these trends up, it could have a bright future ahead.

If you want to continue researching Cliq Digital, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Cliq Digital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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