Has Essbio (SNSE:ESSBIO-C) Got What It Takes To Become A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Essbio (SNSE:ESSBIO-C) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Essbio, this is the formula:

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

0.057 = CL$49b ÷ (CL$900b - CL$44b) (Based on the trailing twelve months to September 2020).

Thus, Essbio has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 9.6%.

See our latest analysis for Essbio

Historical performance is a great place to start when researching a stock so above you can see the gauge for Essbio's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Essbio, check out these free graphs here.

What Does the ROCE Trend For Essbio Tell Us?

The returns on capital haven't changed much for Essbio in recent years. Over the past five years, ROCE has remained relatively flat at around 5.7% and the business has deployed 21% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On Essbio's ROCE

In summary, Essbio has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 83% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Essbio (2 don't sit too well with us) you should be aware of.

While Essbio 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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