If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. One common approach is to try and find a company with Returns is capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that the company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Calix’s (NYSE: CALX) Returns are capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Calix:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.098 = US $ 62m (US $ 775m – US $ 142m) (Based on the trailing twelve months to April 2022).
So, Calix has an ROCE of 9.8%. In absolute terms, that’s a low return but it’s around the Communications industry average of 8.2%.
Check out our latest analysis for Calix
Above you can see how the current ROCE for Calix Compares to its prior Returns is capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on Analyst forecasts for the company.
How Are Returns Trending?
The fact that Calix is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it’s earning 9.8% which is a sight for sore eyes. Not only that, but the company is utilizing 211% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
In another part of our analysis, we noted that the company’s ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore, we can rest assured that the growth in ROCE is a result of the business’ fundamental Improvements, rather than a cooking class featuring this company’s books.
In Conclusion …
In summary, it’s great to see that Calix has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 416% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Calix can keep these trends up, it could have a bright future ahead.
Since virtually every company faces some risk, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Calix (of which 1 makes us a bit uncomfortable!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.