There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Credit Bureau Asia's (SGX:TCU) trend of ROCE, we really liked 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 Credit Bureau Asia, this is the formula:

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

0.34 = S$23m ÷ (S$90m - S$23m) (Based on the trailing twelve months to June 2023).

Therefore, Credit Bureau Asia has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 20%.

Check out our latest analysis for Credit Bureau Asia

In the above chart we have measured Credit Bureau Asia'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 Credit Bureau Asia.

What Does the ROCE Trend For Credit Bureau Asia Tell Us?

We'd be pretty happy with returns on capital like Credit Bureau Asia. The company has consistently earned 34% for the last five years, and the capital employed within the business has risen 125% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Credit Bureau Asia has done well to reduce current liabilities to 26% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Credit Bureau Asia's ROCE

In summary, we're delighted to see that Credit Bureau Asia has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last year, the stock hasn't provided much growth to shareholders in the way of total returns. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

One more thing, we've spotted 1 warning sign facing Credit Bureau Asia that you might find interesting.

Credit Bureau Asia is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.