To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Certara (NASDAQ:CERT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Certara:

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

0.01 = US$15m ÷ (US$1.5b - US$123m) (Based on the trailing twelve months to September 2024).

Therefore, Certara has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 6.8%.

Check out our latest analysis for Certara

In the above chart we have measured Certara's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Certara for free.

So How Is Certara's ROCE Trending?

When we looked at the ROCE trend at Certara, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.0% from 1.8% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Certara's ROCE

Bringing it all together, while we're somewhat encouraged by Certara's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Certara has the makings of a multi-bagger.

If you're still interested in Certara it's worth checking out our FREE intrinsic value approximation for CERT to see if it's trading at an attractive price in other respects.

While Certara may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.