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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Paz (SNSE:PAZ), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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 Paz:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = CL$17b ÷ (CL$580b - CL$148b) (Based on the trailing twelve months to September 2020).
Thus, Paz has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.6%.
View our latest analysis for Paz
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're interested in investigating Paz's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Paz's ROCE Trending?
On the surface, the trend of ROCE at Paz doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
In summary, we're somewhat concerned by Paz's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 118% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Paz (of which 2 can't be ignored!) that you should know about.
While Paz 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. 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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About SNSE:PAZ
Paz
A real estate company, engages in housing projects development business in Chile and Peru.
Mediocre balance sheet second-rate dividend payer.
