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 on that note, Slantse Stara Zagora Tabac AD (BUL:SUN) looks quite promising in regards to its trends of return on capital.
What is 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 Slantse Stara Zagora Tabac AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0037 = лв111k ÷ (лв30m - лв323k) (Based on the trailing twelve months to December 2021).
Thus, Slantse Stara Zagora Tabac AD has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Tobacco industry average of 15%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Slantse Stara Zagora Tabac AD's ROCE against it's prior returns. If you're interested in investigating Slantse Stara Zagora Tabac AD's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Slantse Stara Zagora Tabac AD's ROCE Trend?
The fact that Slantse Stara Zagora Tabac AD is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Slantse Stara Zagora Tabac AD is utilizing 1,814% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Slantse Stara Zagora Tabac AD has decreased current liabilities to 1.1% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
In summary, it's great to see that Slantse Stara Zagora Tabac AD has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to know some of the risks facing Slantse Stara Zagora Tabac AD we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.
While Slantse Stara Zagora Tabac AD 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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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.