If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Atturra (ASX:ATA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Atturra is:

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

0.15 = AU$15m ÷ (AU$162m - AU$64m) (Based on the trailing twelve months to June 2023).

Therefore, Atturra has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 16% generated by the IT industry.

View our latest analysis for Atturra

In the above chart we have measured Atturra's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Atturra.

So How Is Atturra's ROCE Trending?

On the surface, the trend of ROCE at Atturra doesn't inspire confidence. To be more specific, ROCE has fallen from 37% over the last two years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Atturra has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Atturra is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 15% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.