GLG (ASX:GLE) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think GLG (ASX:GLE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 GLG is:

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

0.034 = US$1.9m ÷ (US$92m - US$37m) (Based on the trailing twelve months to December 2024).

Therefore, GLG has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.9%.

View our latest analysis for GLG

Historical performance is a great place to start when researching a stock so above you can see the gauge for GLG's ROCE against it's prior returns. If you'd like to look at how GLG has performed in the past in other metrics, you can view this free graph of GLG's past earnings, revenue and cash flow.

The Trend Of ROCE

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 22% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 3.4%, it's hard to get excited about these developments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 40% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

In Conclusion...

In summary, GLG isn't reinvesting funds back into the business and returns aren't growing. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing GLG, we've discovered 3 warning signs that you should be aware of.

While GLG 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.