To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Alumasc Group's (LON:ALU) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Alumasc Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = UK£10m ÷ (UK£78m - UK£24m) (Based on the trailing twelve months to June 2021).
Therefore, Alumasc Group has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 13% generated by the Building industry.
In the above chart we have measured Alumasc Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alumasc Group.
What Does the ROCE Trend For Alumasc Group Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 26% in that time. 20% is a pretty standard return, and it provides some comfort knowing that Alumasc Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The main thing to remember is that Alumasc Group has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 62% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you want to continue researching Alumasc Group, you might be interested to know about the 3 warning signs that our analysis has discovered.
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.
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.
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