There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Regenbogen (FRA:RGB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Regenbogen, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €2.2m ÷ (€39m - €3.1m) (Based on the trailing twelve months to December 2022).
Therefore, Regenbogen has an ROCE of 6.3%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.
Check out our latest analysis for Regenbogen
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'd like to look at how Regenbogen has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Regenbogen's ROCE Trend?
The returns on capital haven't changed much for Regenbogen in recent years. Over the past five years, ROCE has remained relatively flat at around 6.3% and the business has deployed 65% 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.
Our Take On Regenbogen's ROCE
Long story short, while Regenbogen has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 81% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to continue researching Regenbogen, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Regenbogen may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About DB:RGB
Good value with proven track record.
