If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Carozzi (SNSE:CAROZZI) looks decent, right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for Carozzi, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CL$97b ÷ (CL$1.2t - CL$242b) (Based on the trailing twelve months to September 2020).
So, Carozzi has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Food industry.
View our latest analysis for Carozzi
Historical performance is a great place to start when researching a stock so above you can see the gauge for Carozzi's ROCE against it's prior returns. If you'd like to look at how Carozzi has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. The company has employed 43% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Carozzi's ROCE
To sum it up, Carozzi has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 16% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
On a final note, we found 3 warning signs for Carozzi (1 is concerning) 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. 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:CAROZZI
Excellent balance sheet, good value and pays a dividend.
