To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Aroma AD (BUL:AROM), 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. Analysts use this formula to calculate it for Aroma AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = лв1.4m ÷ (лв42m - лв6.0m) (Based on the trailing twelve months to September 2021).
Therefore, Aroma AD has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.3%.
Check out our latest analysis for Aroma AD
Historical performance is a great place to start when researching a stock so above you can see the gauge for Aroma AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Aroma AD, check out these free graphs here.
What Does the ROCE Trend For Aroma AD Tell Us?
In terms of Aroma AD's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.9% from 5.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Aroma AD's ROCE
Bringing it all together, while we're somewhat encouraged by Aroma AD's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a final note, we found 6 warning signs for Aroma AD (4 are a bit unpleasant) you should be aware of.
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 BUL:AROM
Aroma AD
Manufactures and sells a range of hygiene and cosmetic products under the Aroma brand worldwide.
Solid track record with excellent balance sheet and pays a dividend.
