If you're looking for a multi-bagger, there's a few things to 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. 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 CleanSpace Holdings' (ASX:CSX) 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. To calculate this metric for CleanSpace Holdings, this is the formula:

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

0.38 = AU$16m ÷ (AU$51m - AU$7.9m) (Based on the trailing twelve months to June 2021).

So, CleanSpace Holdings has an ROCE of 38%.  That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out our latest analysis for CleanSpace Holdings  roce

Above you can see how the current ROCE for CleanSpace Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CleanSpace Holdings here  for free.

What Can We Tell From CleanSpace Holdings' ROCE Trend?

We're delighted to see that CleanSpace Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 38% which is a sight for sore eyes. Not only that, but the company is utilizing 860% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.



In Conclusion...

To the delight of most shareholders, CleanSpace Holdings has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 80% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we found 2 warning signs for CleanSpace Holdings (1 is significant)  you should be aware of.

CleanSpace Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.