There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Bapcor (ASX:BAP) so let's look a bit deeper.
What is 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. Analysts use this formula to calculate it for Bapcor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$172m ÷ (AU$1.7b - AU$360m) (Based on the trailing twelve months to December 2020).
So, Bapcor has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Retail Distributors industry.
In the above chart we have measured Bapcor'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 Bapcor here for free.
The Trend Of ROCE
Bapcor is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 172%. So we're very much inspired by what we're seeing at Bapcor thanks to its ability to profitably reinvest capital.
Our Take On Bapcor's ROCE
In summary, it's great to see that Bapcor can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 82% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Bapcor does have some risks though, and we've spotted 2 warning signs for Bapcor that you might be interested in.
While Bapcor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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