To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Aroma AD (BUL:AROM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)
0.072 = лв2.6m ÷ (лв43m - лв6.1m) (Based on the trailing twelve months to September 2020).
So, Aroma AD has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 9.3%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Aroma AD, check out these free graphs here.
What Can We Tell From Aroma AD's ROCE Trend?
Things have been pretty stable at Aroma AD, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Aroma AD to be a multi-bagger going forward.
In a nutshell, Aroma AD has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 8.0% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a separate note, we've found 2 warning signs for Aroma AD you'll probably want to know about.
While Aroma 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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