What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, CLPS Incorporation (NASDAQ:CLPS) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for CLPS Incorporation, this is the formula:

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

0.0028 = US$199k ÷ (US$106m - US$35m) (Based on the trailing twelve months to December 2023).

Thus, CLPS Incorporation has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View our latest analysis for CLPS Incorporation

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CLPS Incorporation has performed in the past in other metrics, you can view this free graph of CLPS Incorporation's past earnings, revenue and cash flow.

What Does the ROCE Trend For CLPS Incorporation Tell Us?

The fact that CLPS Incorporation is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.3% on its capital. Not only that, but the company is utilizing 252% 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.

The Key Takeaway

In summary, it's great to see that CLPS Incorporation has managed to break into profitability and is continuing to reinvest in its business. However the stock is down a substantial 85% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we've found 3 warning signs for CLPS Incorporation that we think you should be aware of.