If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, GasLog (NYSE:GLOG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on GasLog is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.06 = US$293m ÷ (US$5.3b – US$381m) (Based on the trailing twelve months to March 2020).
So, GasLog has an ROCE of 6.0%. On its own, that’s a low figure but it’s around the 6.6% average generated by the Oil and Gas industry.
In the above chart we have a measured GasLog’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 GasLog.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it’s good to see it’s heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.0%. The amount of capital employed has increased too, by 40%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
The Bottom Line
To sum it up, GasLog has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has dived 72% over the last five years, there may be other factors affecting the company’s prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One final note, you should learn about the 4 warning signs we’ve spotted with GasLog (including 1 which is shouldn’t be ignored) .
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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