Caffyns (LON:CFYN) Might Have The Makings Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Caffyns (LON:CFYN) looks quite promising in regards to its trends of return on capital.

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 Caffyns, this is the formula:

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

0.094 = UK£4.9m ÷ (UK£91m - UK£38m) (Based on the trailing twelve months to September 2022).

Thus, Caffyns has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.

Check out our latest analysis for Caffyns

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 Caffyns' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Caffyns is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 81% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Caffyns' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, we're delighted to see that Caffyns has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 57% return over the last five years. In light of that, we think it's worth looking further into this stock because if Caffyns can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Caffyns, we've discovered 2 warning signs that you should be aware of.

While Caffyns 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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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.