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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Regis Resources' (ASX:RRL) 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. To calculate this metric for Regis Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = AU$280m ÷ (AU$1.2b - AU$111m) (Based on the trailing twelve months to December 2020).
Therefore, Regis Resources has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 9.5% earned by companies in a similar industry.
In the above chart we have measured Regis Resources' 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 Regis Resources.
What Does the ROCE Trend For Regis Resources Tell Us?
We'd be pretty happy with returns on capital like Regis Resources. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 122% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
In short, we'd argue Regis Resources has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 1.7% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you want to continue researching Regis Resources, you might be interested to know about the 3 warning signs that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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