To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at BlackLine (NASDAQ:BL) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for BlackLine, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = US$16m ÷ (US$1.9b - US$620m) (Based on the trailing twelve months to June 2024).
Therefore, BlackLine has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Software industry average of 8.4%.
Above you can see how the current ROCE for BlackLine 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 BlackLine .
How Are Returns Trending?
BlackLine has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.3% which is a sight for sore eyes. Not only that, but the company is utilizing 264% 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 Bottom Line On BlackLine's ROCE
Overall, BlackLine gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
On a final note, we found 3 warning signs for BlackLine (1 can't be ignored) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
