Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Argo Blockchain (LON:ARB) so let's look a bit deeper.
Understanding 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. Analysts use this formula to calculate it for Argo Blockchain:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = UK£21m ÷ (UK£317m - UK£73m) (Based on the trailing twelve months to March 2022).
Thus, Argo Blockchain has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Software industry average of 7.4%.
In the above chart we have measured Argo Blockchain's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Argo Blockchain has recently broken into profitability so their prior investments seem to be paying off. About three years ago the company was generating losses but things have turned around because it's now earning 8.5% on its capital. Not only that, but the company is utilizing 990% more capital than before, but that's to be expected from a company 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.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Argo Blockchain has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line
In summary, it's great to see that Argo Blockchain has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 4 warning signs we've spotted with Argo Blockchain (including 1 which doesn't sit too well with us) .
While Argo Blockchain 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.