If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Computer Task Group (NASDAQ:CTG) 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. To calculate this metric for Computer Task Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$15m ÷ (US$174m - US$53m) (Based on the trailing twelve months to July 2022).
So, Computer Task Group has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
In the above chart we have measured Computer Task Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Computer Task Group here for free.
What Does the ROCE Trend For Computer Task Group Tell Us?
The trends we've noticed at Computer Task Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 26%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Computer Task Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Computer Task Group has. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Computer Task Group does have some risks though, and we've spotted 1 warning sign for Computer Task Group that you might be interested in.
While Computer Task Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
What are the risks and opportunities for Computer Task Group?
Trading at 48% below our estimate of its fair value
Earnings grew by 103.4% over the past year
Shareholders have been diluted in the past year
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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.