We Think Excelsior Capital (ASX:ECL) Might Have The DNA Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Excelsior Capital's (ASX:ECL) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Excelsior Capital:

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

0.21 = AU$14m ÷ (AU$76m - AU$11m) (Based on the trailing twelve months to December 2022).

Thus, Excelsior Capital has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Electrical industry average of 5.1%.

Check out our latest analysis for Excelsior Capital

Historical performance is a great place to start when researching a stock so above you can see the gauge for Excelsior Capital's ROCE against it's prior returns. If you're interested in investigating Excelsior Capital's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Excelsior Capital is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

To sum it up, Excelsior Capital has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 94% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Excelsior Capital can keep these trends up, it could have a bright future ahead.

Like most companies, Excelsior Capital does come with some risks, and we've found 1 warning sign that you should be aware of.

Excelsior Capital 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.