What Do The Returns At Capital Appreciation (JSE:CTA) Mean Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. With that in mind, we've noticed some promising trends at Capital Appreciation (JSE:CTA) so let's look a bit deeper.

What is 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)

0.12 = R158m ÷ (R1.4b - R74m) (Based on the trailing twelve months to September 2020).

Therefore, Capital Appreciation has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the IT industry average it falls behind.

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 want to delve into the historical earnings, revenue and cash flow of Capital Appreciation, check out these free graphs here.

What Does the ROCE Trend For Capital Appreciation Tell Us?

We like the trends that we're seeing from Capital Appreciation. Over the last four years, returns on capital employed have risen substantially to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 33%. 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

All in all, it's terrific to see that Capital Appreciation is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 37% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Capital Appreciation does have some risks though, and we've spotted 2 warning signs for Capital Appreciation that you might be interested in.

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.

When trading Capital Appreciation or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.