There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in bet-at-home.com's (ETR:ACX) returns on capital, so let's have a look.
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 bet-at-home.com:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.49 = €28m ÷ (€100m - €43m) (Based on the trailing twelve months to March 2021).
So, bet-at-home.com has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 11%.
View our latest analysis for bet-at-home.com
Above you can see how the current ROCE for bet-at-home.com compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering bet-at-home.com here for free.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at bet-at-home.com. The figures show that over the last five years, returns on capital have grown by 45%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 37% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Bottom Line
In summary, it's great to see that bet-at-home.com has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 17% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing to note, we've identified 1 warning sign with bet-at-home.com and understanding it should be part of your investment process.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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 XTRA:ACX
bet-at-home.com
Through its subsidiaries, provides online sports betting and gaming services.
Undervalued with reasonable growth potential.
