Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Cambium Networks' (NASDAQ:CMBM) returns on capital, so let's have a look.
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 Cambium Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$45m ÷ (US$217m - US$86m) (Based on the trailing twelve months to June 2021).
Thus, Cambium Networks has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.
In the above chart we have measured Cambium Networks' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Cambium Networks here for free.
What Does the ROCE Trend For Cambium Networks Tell Us?
Investors would be pleased with what's happening at Cambium Networks. Over the last four years, returns on capital employed have risen substantially to 35%. The amount of capital employed has increased too, by 79%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Cambium Networks' ROCE
All in all, it's terrific to see that Cambium Networks is reaping the rewards from prior investments and is growing its capital base. And a remarkable 118% total return over the last year tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Cambium Networks does have some risks though, and we've spotted 2 warning signs for Cambium Networks that you might be interested in.
Cambium Networks 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.
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.
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