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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 ran our eye over Clearfield's (NASDAQ:CLFD) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Clearfield:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$15m ÷ (US$104m - US$12m) (Based on the trailing twelve months to March 2021).
So, Clearfield has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Communications industry.
Above you can see how the current ROCE for Clearfield 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 Clearfield here for free.
What Does the ROCE Trend For Clearfield Tell Us?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 65% more capital into its operations. 17% is a pretty standard return, and it provides some comfort knowing that Clearfield has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
The main thing to remember is that Clearfield has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 101% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Clearfield does have some risks though, and we've spotted 1 warning sign for Clearfield that you might be interested in.
While Clearfield isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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