There Are Reasons To Feel Uneasy About cBrain's (CPH:CBRAIN) Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at cBrain (CPH:CBRAIN) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on cBrain is:

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

0.17 = kr.21m ÷ (kr.155m - kr.33m) (Based on the trailing twelve months to December 2020).

Thus, cBrain has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Software industry.

Check out our latest analysis for cBrain

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

The Trend Of ROCE

When we looked at the ROCE trend at cBrain, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 24% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From cBrain's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that cBrain is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 401% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

While cBrain doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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. 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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