What Can The Trends At ChannelAdvisor (NYSE:ECOM) Tell Us About Their Returns?

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at ChannelAdvisor (NYSE:ECOM) so let's look a bit deeper.

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. The formula for this calculation on ChannelAdvisor is:

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

0.15 = US$19m ÷ (US$172m - US$43m) (Based on the trailing twelve months to September 2020).

Thus, ChannelAdvisor has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.4% it's much better.

Check out our latest analysis for ChannelAdvisor

In the above chart we have measured ChannelAdvisor'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 ChannelAdvisor here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that ChannelAdvisor is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. In addition to that, ChannelAdvisor is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From ChannelAdvisor's ROCE

Long story short, we're delighted to see that ChannelAdvisor's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 3 warning signs for ChannelAdvisor that we think you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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