CVS Bay Area (TSE:2687) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, CVS Bay Area (TSE:2687) looks quite promising in regards to its trends of return on capital.

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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. To calculate this metric for CVS Bay Area, this is the formula:

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

0.062 = JP¥490m ÷ (JP¥11b - JP¥3.0b) (Based on the trailing twelve months to November 2024).

So, CVS Bay Area has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.8%.

See our latest analysis for CVS Bay Area

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

What The Trend Of ROCE Can Tell Us

CVS Bay Area has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 4,961% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On CVS Bay Area's ROCE

To bring it all together, CVS Bay Area has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 39% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

CVS Bay Area does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

While CVS Bay Area 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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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.