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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at SEEK (ASX:SEK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for SEEK:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = AU$408m ÷ (AU$5.2b - AU$599m) (Based on the trailing twelve months to December 2022).
Thus, SEEK has an ROCE of 8.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.8%.
See our latest analysis for SEEK
Above you can see how the current ROCE for SEEK compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SEEK.
What Does the ROCE Trend For SEEK Tell Us?
When we looked at the ROCE trend at SEEK, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On SEEK's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SEEK. In light of this, the stock has only gained 23% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing: We've identified 2 warning signs with SEEK (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
While SEEK isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.