If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Character Group (LON:CCT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Character Group is:

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

0.13 = UK￡5.3m ÷ (UK￡71m - UK￡31m) (Based on the trailing twelve months to August 2023).

So, Character Group has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Leisure industry average of 15%.

View our latest analysis for Character Group

Above you can see how the current ROCE for Character Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Character Group.

The Trend Of ROCE

On the surface, the trend of ROCE at Character Group doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 13%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Character Group has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Character Group's ROCE

In summary, we're somewhat concerned by Character Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 37% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.