If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Socket Mobile (NASDAQ:SCKT), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Socket Mobile:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$2.3m ÷ (US$31m - US$6.8m) (Based on the trailing twelve months to June 2022).
So, Socket Mobile has an ROCE of 9.5%. On its own, that's a low figure but it's around the 11% average generated by the Tech industry.
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 Socket Mobile's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Socket Mobile's ROCE Trending?
On the surface, the trend of ROCE at Socket Mobile doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Socket Mobile's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Socket Mobile is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 32% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One more thing: We've identified 2 warning signs with Socket Mobile (at least 1 which is significant) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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