What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating CUC (TSE:9158), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on CUC is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = JP¥4.2b ÷ (JP¥71b - JP¥9.0b) (Based on the trailing twelve months to June 2024).
Therefore, CUC has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.7%.
View our latest analysis for CUC
Above you can see how the current ROCE for CUC compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for CUC .
What Does the ROCE Trend For CUC Tell Us?
When we looked at the ROCE trend at CUC, we didn't gain much confidence. Around three years ago the returns on capital were 18%, but since then they've fallen to 6.9%. 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.
On a related note, CUC has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
To conclude, we've found that CUC is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 43% in the last year. Therefore based on the analysis done in this article, we don't think CUC has the makings of a multi-bagger.
On a final note, we've found 1 warning sign for CUC that we think you should be aware of.
While CUC 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.
About TSE:9158
Undervalued with solid track record.
