If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Smart Parking's (ASX:SPZ) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Smart Parking:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = AU$2.0m ÷ (AU$46m - AU$11m) (Based on the trailing twelve months to December 2021).
Thus, Smart Parking has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.
View our latest analysis for Smart Parking
Historical performance is a great place to start when researching a stock so above you can see the gauge for Smart Parking's ROCE against it's prior returns. If you'd like to look at how Smart Parking has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.8%. The amount of capital employed has increased too, by 44%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
All in all, it's terrific to see that Smart Parking is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 32% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Smart Parking does have some risks though, and we've spotted 2 warning signs for Smart Parking that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About ASX:SPZ
Smart Parking
Engages in the design, development, and management of parking management solutions in New Zealand, Australia, Germany, and the United Kingdom.
Flawless balance sheet with high growth potential.
