Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Star Combo Pharma's (ASX:S66) returns on capital, so let's have a look.

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

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 Star Combo Pharma is:

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

0.024 = AU$923k ÷ (AU$43m - AU$4.9m) (Based on the trailing twelve months to June 2024).

Thus, Star Combo Pharma has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 10%.

Check out 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Star Combo Pharma.

What Can We Tell From Star Combo Pharma's ROCE Trend?

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 2.4% which is a sight for sore eyes. In addition to that, Star Combo Pharma is employing 73% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

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. Astute investors may have an opportunity here because the stock has declined 62% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Star Combo Pharma does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.