Yahoo Finance Investors Should Be Encouraged By Cerillion's (LON:CER) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Cerillion's (LON:CER) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Cerillion is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = UK£15m ÷ (UK£53m - UK£12m) (Based on the trailing twelve months to September 2023).
Therefore, Cerillion has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Software industry average of 8.7%.
View our latest analysis for Cerillion
Above you can see how the current ROCE for Cerillion compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cerillion for free.
What Can We Tell From Cerillion's ROCE Trend?
The trends we've noticed at Cerillion are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 37%. The amount of capital employed has increased too, by 138%. So we're very much inspired by what we're seeing at Cerillion thanks to its ability to profitably reinvest capital.
What We Can Learn From Cerillion's ROCE
All in all, it's terrific to see that Cerillion is reaping the rewards from prior investments and is growing its capital base. And a remarkable 885% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Cerillion can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Cerillion, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
