If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, 3Peak (SHSE:688536) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for 3Peak, this is the formula:

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

0.12 = CN¥420m ÷ (CN¥3.6b - CN¥188m) (Based on the trailing twelve months to March 2022).

Thus, 3Peak has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Semiconductor industry.

Check out our latest analysis for 3Peak

In the above chart we have measured 3Peak's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for 3Peak.

So How Is 3Peak's ROCE Trending?

3Peak has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 12% on its capital. And unsurprisingly, like most companies trying to break into the black, 3Peak is utilizing 5,881% more capital than it was four years ago. 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.

One more thing to note, 3Peak has decreased current liabilities to 5.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that 3Peak has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Long story short, we're delighted to see that 3Peak's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 19% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 1 warning sign for 3Peak that we think you should be aware of.

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.