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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Celebrus Technologies (LON:CLBS) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Celebrus Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£5.0m ÷ (UK£59m - UK£28m) (Based on the trailing twelve months to March 2024).
Thus, Celebrus Technologies has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 17% generated by the IT industry.
Check out our latest analysis for Celebrus Technologies
In the above chart we have measured Celebrus Technologies' 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 Celebrus Technologies .
What Can We Tell From Celebrus Technologies' ROCE Trend?
In terms of Celebrus Technologies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. 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.
On a side note, Celebrus Technologies' current liabilities have increased over the last five years to 47% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
In Conclusion...
While returns have fallen for Celebrus Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 31% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.