Is Capital Appreciation (JSE:CTA) A Future Multi-bagger?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Capital Appreciation (JSE:CTA) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Capital Appreciation is:

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

0.11 = R145m ÷ (R1.4b - R98m) (Based on the trailing twelve months to March 2020).

Therefore, Capital Appreciation has an ROCE of 11%. In isolation, that's a pretty standard return but against the IT industry average of 20%, it's not as good.

See our latest analysis for Capital Appreciation

Historical performance is a great place to start when researching a stock so above you can see the gauge for Capital Appreciation's ROCE against it's prior returns. If you're interested in investigating Capital Appreciation's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Capital Appreciation's ROCE Trending?

The trends we've noticed at Capital Appreciation are quite reassuring. Over the last four years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 34%. So we're very much inspired by what we're seeing at Capital Appreciation thanks to its ability to profitably reinvest capital.

The Bottom Line On Capital Appreciation's ROCE

To sum it up, Capital Appreciation has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 9.6% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Capital Appreciation, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Capital Appreciation 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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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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