Cerillion (LON:CER) Is Very Good At Capital Allocation

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. And in light of that, the trends we're seeing at Cerillion's (LON:CER) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Cerillion:

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

0.36 = UK£9.8m ÷ (UK£40m - UK£12m) (Based on the trailing twelve months to March 2022).

So, Cerillion has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 8.3% earned by companies in a similar industry.

View our latest analysis for Cerillion

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

The Trend Of ROCE

We like the trends that we're seeing from Cerillion. The data shows that returns on capital have increased substantially over the last five years to 36%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 60%. So we're very much inspired by what we're seeing at Cerillion thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Cerillion has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 464% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Cerillion looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CER is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.