If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Although, when we looked at Casa Systems (NASDAQ:CASA), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Casa Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$38m ÷ (US$479m - US$101m) (Based on the trailing twelve months to March 2021).
Therefore, Casa Systems has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Communications industry.
Above you can see how the current ROCE for Casa Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Casa Systems here for free.
What Can We Tell From Casa Systems' ROCE Trend?
In terms of Casa Systems' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 48%, but since then they've fallen to 10%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Casa Systems. And there could be an opportunity here if other metrics look good too, because the stock has declined 57% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 3 warning signs for Casa Systems (2 are significant) 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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