What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Catcha Digital Berhad (KLSE:CATCHA) so let's look a bit deeper.

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. To calculate this metric for Catcha Digital Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.057 = RM3.3m ÷ (RM70m - RM12m) (Based on the trailing twelve months to December 2023).

So, Catcha Digital Berhad has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 13%.

View our latest analysis for Catcha Digital Berhad

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'd like to look at how Catcha Digital Berhad has performed in the past in other metrics, you can view this free graph of Catcha Digital Berhad's past earnings, revenue and cash flow.

The Trend Of ROCE

Catcha Digital Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.7% which is a sight for sore eyes. In addition to that, Catcha Digital Berhad is employing 783% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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 17% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that Catcha Digital Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 63% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Catcha Digital Berhad can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Catcha Digital Berhad (of which 1 can't be ignored!) that you should know about.

While Catcha Digital Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.