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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Evertz Technologies' (TSE:ET) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Evertz Technologies:

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

0.31 = CA$88m ÷ (CA$481m - CA$198m) (Based on the trailing twelve months to July 2024).

Thus, Evertz Technologies has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.

See our latest analysis for Evertz Technologies

Above you can see how the current ROCE for Evertz Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Evertz Technologies .

What Can We Tell From Evertz Technologies' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Evertz Technologies. The data shows that returns on capital have increased by 23% over the trailing five years. The company is now earning CA$0.3 per dollar of capital employed. In regards to capital employed, Evertz Technologies appears to been achieving more with less, since the business is using 26% less capital to run its operation. Evertz Technologies may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In the end, Evertz Technologies has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 1.2% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Evertz Technologies, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.