What Can The Trends At ContourGlobal (LON:GLO) Tell Us About Their Returns?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at ContourGlobal (LON:GLO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 ContourGlobal is:

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

0.072 = US$331m ÷ (US$5.3b - US$716m) (Based on the trailing twelve months to June 2020).

Thus, ContourGlobal has an ROCE of 7.2%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.

View our latest analysis for ContourGlobal

Above you can see how the current ROCE for ContourGlobal compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ContourGlobal here for free.

What Does the ROCE Trend For ContourGlobal Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.2%. 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 62%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On ContourGlobal's ROCE

All in all, it's terrific to see that ContourGlobal is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last three years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

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

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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