Creightons (LON:CRL) Is Investing Its Capital With Increasing Efficiency
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Creightons (LON:CRL) we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Creightons is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = UK£5.2m ÷ (UK£33m - UK£12m) (Based on the trailing twelve months to September 2020).
So, Creightons has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.
Check out our latest analysis for Creightons
Historical performance is a great place to start when researching a stock so above you can see the gauge for Creightons' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Creightons, check out these free graphs here.
What Can We Tell From Creightons' ROCE Trend?
The trends we've noticed at Creightons are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 219% 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.
In Conclusion...
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 Creightons has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Creightons does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
This article by Simply Wall St is general in nature. 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.
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