To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Celsius Holdings' (NASDAQ:CELH) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Celsius Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = US$7.8m ÷ (US$148m - US$39m) (Based on the trailing twelve months to March 2021).
Therefore, Celsius Holdings has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Beverage industry average of 13%.
Above you can see how the current ROCE for Celsius Holdings 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 Celsius Holdings.
How Are Returns Trending?
Celsius Holdings has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 7.1% on its capital. Not only that, but the company is utilizing 798% 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.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
What We Can Learn From Celsius Holdings' ROCE
Overall, Celsius Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 3,010% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Celsius Holdings can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 4 warning signs with Celsius Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.
While Celsius Holdings 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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