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. 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. So when we looked at Star Combo Pharma (ASX:S66) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Star Combo Pharma, this is the formula:

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

0.033 = AU$1.3m ÷ (AU$41m - AU$2.9m) (Based on the trailing twelve months to December 2023).

Therefore, Star Combo Pharma has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 11%.

Check out our latest analysis for Star Combo Pharma

Historical performance is a great place to start when researching a stock so above you can see the gauge for Star Combo Pharma's ROCE against it's prior returns. If you're interested in investigating Star Combo Pharma's past further, check out this free graph covering Star Combo Pharma's past earnings, revenue and cash flow.

What Does the ROCE Trend For Star Combo Pharma Tell Us?

We're delighted to see that Star Combo Pharma is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.3% on its capital. In addition to that, Star Combo Pharma is employing 126% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Star Combo Pharma's ROCE

In summary, it's great to see that Star Combo Pharma has managed to break into profitability and is continuing to reinvest in its business. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.