If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at C-Lab (TLV:CLAB) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 C-Lab is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = ₪6.9m ÷ (₪126m – ₪61m) (Based on the trailing twelve months to December 2022).
Therefore, C-Lab has an ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 9.0% generated by the Tech industry.
Check out our latest analysis for C-Lab
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating C-Lab’s past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From C-Lab’s ROCE Trend?
Investors would be pleased with what’s happening at C-Lab. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
On a separate but related note, it’s important to know that C-Lab has a current liabilities to total assets ratio of 48%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what C-Lab has. Astute investors may have an opportunity here because the stock has declined 25% in the last year. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
Like most companies, C-Lab does come with some risks, and we’ve found 1 warning sign that you should be aware of.
While C-Lab isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we’re helping make it simple.
Find out whether C-Lab is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
