Many Would Be Envious Of Computer Direct Group's (TLV:CMDR) Excellent Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Computer Direct Group is:

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

0.20 = ₪199m ÷ (₪2.0b - ₪960m) (Based on the trailing twelve months to December 2021).

So, Computer Direct Group has an ROCE of 20%. On its own that's a fantastic return on capital, though it's the same as the IT industry average of 20%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Computer Direct Group, check out these free graphs here.

What Can We Tell From Computer Direct Group's ROCE Trend?

We'd be pretty happy with returns on capital like Computer Direct Group. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 153% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Computer Direct Group's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. 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. On top of that, the stock has rewarded shareholders with a remarkable 281% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Computer Direct Group you'll probably want to know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.