Has ATCO (TSE:ACO.X) Got What It Takes To Become A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating ATCO (TSE:ACO.X), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on ATCO is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.052 = CA$1.1b ÷ (CA$22b - CA$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, ATCO has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

See our latest analysis for ATCO

In the above chart we have measured ATCO's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ATCO.

How Are Returns Trending?

Things have been pretty stable at ATCO, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at ATCO in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why ATCO has been paying out 61% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.

The Bottom Line On ATCO's ROCE

We can conclude that in regards to ATCO's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing ATCO we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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. 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.
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