Here's What Computer Direct Group's (TLV:CMDR) Strong Returns On Capital Means

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Computer Direct Group (TLV:CMDR), we liked what we saw.

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. Analysts use this formula to calculate it for Computer Direct Group:

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

0.20 = ₪131m ÷ (₪1.2b - ₪587m) (Based on the trailing twelve months to September 2020).

Thus, Computer Direct Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 17%.

See our latest analysis for Computer Direct Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Computer Direct Group's ROCE against it's prior returns. If you're interested in investigating Computer Direct Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Computer Direct Group's ROCE Trending?

It's hard not to be impressed by Computer Direct Group's returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 65% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another thing to note, Computer Direct Group has a high ratio of current liabilities to total assets of 48%. 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.

Our Take On Computer Direct Group's ROCE

In short, we'd argue Computer Direct Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 332% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Computer Direct Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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. 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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