Is EVZ (ASX:EVZ) A Future Multi-bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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 when we looked at EVZ (ASX:EVZ) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on EVZ is:

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

0.045 = AU$1.1m ÷ (AU$41m - AU$16m) (Based on the trailing twelve months to December 2020).

Thus, EVZ has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

View our latest analysis for EVZ

Historical performance is a great place to start when researching a stock so above you can see the gauge for EVZ's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of EVZ, check out these free graphs here.

How Are Returns Trending?

The fact that EVZ is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.5% on its capital. In addition to that, EVZ is employing 199% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 38%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that EVZ has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

In summary, it's great to see that EVZ has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 46% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, EVZ does come with some risks, and we've found 2 warning signs 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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