There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Clever Global (BME:CLE), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Clever Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €1.2m ÷ (€15m - €5.3m) (Based on the trailing twelve months to December 2020).
Thus, Clever Global has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the IT industry.
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 Clever Global's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Clever Global's ROCE Trend?
We weren't thrilled with the trend because Clever Global's ROCE has reduced by 50% over the last five years, while the business employed 93% more capital. That being said, Clever Global raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Clever Global probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Clever Global have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 50% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Clever Global does have some risks, we noticed 4 warning signs (and 3 which are concerning) we think you should know about.
While Clever Global 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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Clever Global, S.A. provides technology and smart sourcing services worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Slightly overvalued with weak fundamentals.