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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Collins Foods (ASX:CKF), it didn't seem to tick all of these boxes.
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. To calculate this metric for Collins Foods, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = AU$96m ÷ (AU$1.2b - AU$141m) (Based on the trailing twelve months to October 2021).
Thus, Collins Foods has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Hospitality industry average of 7.9%.
In the above chart we have measured Collins Foods' 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 report for Collins Foods.
So How Is Collins Foods' ROCE Trending?
On the surface, the trend of ROCE at Collins Foods doesn't inspire confidence. To be more specific, ROCE has fallen from 14% 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.
The Bottom Line On Collins Foods' 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 Collins Foods. And long term investors must be optimistic going forward because the stock has returned a huge 101% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing, we've spotted 2 warning signs facing Collins Foods that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.