To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Instructure Holdings (NYSE:INST) so let's look a bit deeper.
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. The formula for this calculation on Instructure Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = US$23m ÷ (US$2.2b - US$351m) (Based on the trailing twelve months to December 2023).
So, Instructure Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.
Above you can see how the current ROCE for Instructure Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Instructure Holdings .
How Are Returns Trending?
The fact that Instructure Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Instructure Holdings is utilizing 1,173% more capital than it was five years ago. 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Instructure Holdings' ROCE
In summary, it's great to see that Instructure Holdings has managed to break into profitability and is continuing to reinvest in its business. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Instructure Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.
While Instructure Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.