Our Take On The Returns On Capital At Cambridge Technology Enterprises (NSE:CTE)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Cambridge Technology Enterprises (NSE:CTE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Cambridge Technology Enterprises:

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

0.087 = ₹77m ÷ (₹1.2b - ₹270m) (Based on the trailing twelve months to September 2020).

Therefore, Cambridge Technology Enterprises has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for Cambridge Technology Enterprises

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cambridge Technology Enterprises' ROCE against it's prior returns. If you'd like to look at how Cambridge Technology Enterprises has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cambridge Technology Enterprises Tell Us?

On the surface, the trend of ROCE at Cambridge Technology Enterprises doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Cambridge Technology Enterprises' ROCE

To conclude, we've found that Cambridge Technology Enterprises is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 72% over the last five years, it appears investors are expecting the worst. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know more about Cambridge Technology Enterprises, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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