To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Cachet Pharmaceutical's (SZSE:002462) ROCE trend, we were pretty happy with what we saw.
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. To calculate this metric for Cachet Pharmaceutical, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CN¥946m ÷ (CN¥17b - CN¥10b) (Based on the trailing twelve months to March 2023).
Therefore, Cachet Pharmaceutical has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Healthcare industry.
Check out our latest analysis for Cachet Pharmaceutical
Above you can see how the current ROCE for Cachet Pharmaceutical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cachet Pharmaceutical here for free.
What Does the ROCE Trend For Cachet Pharmaceutical Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 56% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Cachet Pharmaceutical has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Cachet Pharmaceutical's current liabilities are still rather high at 63% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Cachet Pharmaceutical's ROCE
The main thing to remember is that Cachet Pharmaceutical has proven its ability to continually reinvest at respectable rates of return. Yet over the last five years the stock has declined 23%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you'd like to know about the risks facing Cachet Pharmaceutical, we've discovered 1 warning sign that 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.