If you're looking for a multi-bagger, there's a few things to 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. Although, when we looked at Shine Justice (ASX:SHJ), it didn't seem to tick all of these boxes.
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 Shine Justice is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = AU$41m ÷ (AU$550m - AU$121m) (Based on the trailing twelve months to December 2020).
Therefore, Shine Justice has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 9.4%.
Check out our latest analysis for Shine Justice
In the above chart we have measured Shine Justice's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shine Justice here for free.
The Trend Of ROCE
In terms of Shine Justice's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 70% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Shine Justice's ROCE
As we've seen above, Shine Justice's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 3.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 1 warning sign facing Shine Justice that you might find interesting.
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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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About ASX:SHJ
Shine Justice
Through its subsidiaries, provides damages-based plaintiff litigation legal services in Australia and New Zealand.
Excellent balance sheet with proven track record and pays a dividend.
