Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Cambium Networks’ (NASDAQ:CMBM) returns on capital, so let’s have a look.
What is 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 Cambium Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.27 = US$27m ÷ (US$206m – US$108m) (Based on the trailing twelve months to December 2020).
Therefore, Cambium Networks has an ROCE of 27%. In absolute terms that’s a great return and it’s even better than the Communications industry average of 7.8%.
See our latest analysis for Cambium Networks
Above you can see how the current ROCE for Cambium Networks compares to its prior returns on 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.
What The Trend Of ROCE Can Tell Us
The trends we’ve noticed at Cambium Networks are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 27%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 24%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 52% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line On Cambium Networks’ ROCE
In summary, it’s great to see that Cambium Networks can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 560% to shareholders over the last year, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Cambium Networks can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 3 warning signs for Cambium Networks you’ll probably want to know about.
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.
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