There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Escalade’s (NASDAQ:ESCA) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What is it?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Escalade is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$20m ÷ (US$171m – US$34m) (Based on the trailing twelve months to July 2020).
Thus, Escalade has an ROCE of 14%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Leisure industry average of 17%.
In the above chart we have measured Escalade’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Escalade.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 14%. 14% is a pretty standard return, and it provides some comfort knowing that Escalade has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Escalade’s ROCE
The main thing to remember is that Escalade has proven its ability to continually reinvest at respectable rates of return. However, over the last five years, the stock has only delivered a 31% return to shareholders who held over that period. So to determine if Escalade is a multi-bagger going forward, we’d suggest digging deeper into the company’s other fundamentals.
Like most companies, Escalade does come with some risks, and we’ve found 1 warning sign that you should be aware of.
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. 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.
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