To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, ROCKWOOL International (CPH:ROCK B) looks quite promising in regards to its trends of return on capital.
What is 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 ROCKWOOL International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €351m ÷ (€2.9b - €509m) (Based on the trailing twelve months to March 2021).
Therefore, ROCKWOOL International has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Building industry.
Above you can see how the current ROCE for ROCKWOOL International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ROCKWOOL International.
What Can We Tell From ROCKWOOL International's ROCE Trend?
The trends we've noticed at ROCKWOOL International are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 53%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On ROCKWOOL International's ROCE
All in all, it's terrific to see that ROCKWOOL International is reaping the rewards from prior investments and is growing its capital base. And a remarkable 158% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing ROCKWOOL International, we've discovered 1 warning sign that you should be aware of.
While ROCKWOOL International 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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