There's Been No Shortage Of Growth Recently For CIRCULATIONLtd's (TSE:7379) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, CIRCULATIONLtd (TSE:7379) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for CIRCULATIONLtd:

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

0.12 = JP¥339m ÷ (JP¥3.7b - JP¥773m) (Based on the trailing twelve months to April 2024).

So, CIRCULATIONLtd has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Professional Services industry average it falls behind.

Check out our latest analysis for CIRCULATIONLtd

Above you can see how the current ROCE for CIRCULATIONLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for CIRCULATIONLtd .

How Are Returns Trending?

The fact that CIRCULATIONLtd is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. Not only that, but the company is utilizing 271% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 21%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that CIRCULATIONLtd has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From CIRCULATIONLtd's ROCE

In summary, it's great to see that CIRCULATIONLtd has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 80% over the last three years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with CIRCULATIONLtd and understanding them should be part of your investment process.

While CIRCULATIONLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com