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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Star Combo Pharma (ASX:S66) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 Star Combo Pharma is:

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%.

See 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'd like to look at how Star Combo Pharma has performed in the past in other metrics, you can view this free graph of 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. The company was generating losses five years ago, but now it's earning 3.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Star Combo Pharma is utilizing 126% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In Conclusion...

Overall, Star Combo Pharma gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. However the stock is down a substantial 76% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.