What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of GlobalData (LON:DATA) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for GlobalData, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = UK£69m ÷ (UK£501m - UK£154m) (Based on the trailing twelve months to June 2023).
Thus, GlobalData has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 16%.
Check out our latest analysis for GlobalData
In the above chart we have measured GlobalData'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 GlobalData here for free.
How Are Returns Trending?
The trends we've noticed at GlobalData are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. 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 49%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From GlobalData's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what GlobalData has. Since the stock has returned a staggering 115% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if GlobalData can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing GlobalData, we've discovered 2 warning signs that you should be aware of.