To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. With that in mind, we've noticed some promising trends at Acheter-Louer.Fr (EPA:ALALO) so let's look a bit deeper.
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 Acheter-Louer.Fr, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.045 = €575k ÷ (€13m - €315k) (Based on the trailing twelve months to December 2019).
So, Acheter-Louer.Fr has an ROCE of 4.5%. On its own, that's a low figure but it's around the 5.0% average generated by the Interactive Media and Services industry.
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 Acheter-Louer.Fr has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at Acheter-Louer.Fr thanks to its ability to profitably reinvest capital.On a related note, the company's ratio of current liabilities to total assets has decreased to 2.4%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Acheter-Louer.Fr has. Although the company may be facing some issues elsewhere since the stock has plunged 71% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you'd like to know more about Acheter-Louer.Fr, we've spotted 4 warning signs, and 1 of them can't be ignored.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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