Did you know that there are some financial metrics that can give clues about a potential multi-bagger? Usually we want to identify a trend of growth return on the capital employed (ROCE) and in parallel a growing base of capital employed. When you see this, it usually means that it is a company with a great business model and plenty of profitable reinvestment opportunities. That is why we have taken a quick look Capital city (LON:CAPD) ROCE trend, we were pretty pleased with what we saw.
Return on Capital Employed (ROCE): What is it?
If you have never worked with ROCE, it measures the “return” (profit before tax) that a company generates on the capital employed in its business. The formula for this capital calculation is:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.16 = $61 million ÷ ($468 million – $96 million) (Based on the last twelve months to December 2023).
So, Capital has a ROCE of 16%. In absolute terms, this is a satisfactory return, but it is significantly better than the metals and mining industry average of 9.0%.
Check out our latest analysis for Capital
Above you can see how the current ROCE on capital compares to previous returns on capital, but there is only so much that can be said from the past. If you are interested, you can read analyst forecasts in our free Analyst report for Capital.
What the ROCE trend can tell us
Although the return on capital is good, it hasn’t changed much. Over the past five years, the return on capital has remained relatively stable at around 16%, and the company has invested 331% more capital in its operations. 16% is a fairly normal return, and it’s reassuring to know that Capital has consistently generated that amount. Stable returns of this magnitude can be unexciting, but if they can be sustained over the long term, they often provide shareholders with nice returns.
What we can learn from the ROCE of capital
In summary, Capital has simply been reinvesting capital steadily and at these decent rates of return, so it’s no surprise that shareholders have received a respectable 86% return by holding over the past five years. While the positive underlying trends can be attributed to investors, we still think this stock is worth investigating further.
And we discovered something else 2 warning signs with a view to Capital, which you may find interesting.
For those who like to invest in solid companies, look at this free List of companies with solid balance sheets and high returns on equity.
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
