Semrush Holdings (NYSE:SEMR) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 when we looked at Semrush Holdings (NYSE:SEMR) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Semrush Holdings, this is the formula:

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

0.02 = US$4.9m ÷ (US$342m - US$101m) (Based on the trailing twelve months to March 2024).

Therefore, Semrush Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.6%.

Check out our latest analysis for Semrush Holdings

In the above chart we have measured Semrush Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Semrush Holdings .

What Does the ROCE Trend For Semrush Holdings Tell Us?

We're delighted to see that Semrush Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 2.0% which is a sight for sore eyes. Not only that, but the company is utilizing 1,392% 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 related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Semrush Holdings' ROCE

Overall, Semrush 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. And since the stock has fallen 29% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 2 warning signs for Semrush Holdings that we think you should be aware of.

While Semrush Holdings 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.

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