If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Clever Global (BME:CLE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. 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)
0.14 = €1.6m ÷ (€15m - €4.2m) (Based on the trailing twelve months to June 2021).
Therefore, Clever Global has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Clever Global's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Clever Global, check out these free graphs here.
The Trend Of ROCE
On the surface, the trend of ROCE at Clever Global doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
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. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Clever Global we've found 5 warning signs (3 shouldn't be ignored!) that you should be aware of before investing here.
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.