Investors Will Want Crayon Group Holding's (OB:CRAYN) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Crayon Group Holding (OB:CRAYN) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Crayon Group Holding is:

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

0.17 = kr266m ÷ (kr5.7b - kr4.1b) (Based on the trailing twelve months to March 2021).

Thus, Crayon Group Holding has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 12% it's much better.

See our latest analysis for Crayon Group Holding

Above you can see how the current ROCE for Crayon Group Holding 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 report for Crayon Group Holding.

What The Trend Of ROCE Can Tell Us

The fact that Crayon Group Holding is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 17% on its capital. In addition to that, Crayon Group Holding is employing 47% 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 73% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Crayon Group Holding's ROCE

To the delight of most shareholders, Crayon Group Holding has now broken into profitability. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Crayon Group Holding can keep these trends up, it could have a bright future ahead.

If you want to continue researching Crayon Group Holding, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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