Cy4gate's (BIT:CY4) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Cy4gate's (BIT:CY4) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Cy4gate, this is the formula:

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

0.19 = €5.1m ÷ (€33m - €5.8m) (Based on the trailing twelve months to December 2020).

So, Cy4gate has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Software industry.

See our latest analysis for Cy4gate

Above you can see how the current ROCE for Cy4gate 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 Cy4gate here for free.

How Are Returns Trending?

We're delighted to see that Cy4gate is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. In addition to that, Cy4gate is employing 656% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Cy4gate has decreased current liabilities to 18% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Cy4gate's ROCE

In summary, it's great to see that Cy4gate has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 119% to shareholders over the last year, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Cy4gate does have some risks though, and we've spotted 1 warning sign for Cy4gate that you might be interested in.

While Cy4gate isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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