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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Indus Gas (LON:INDI), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Indus Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$53m ÷ (US$1.1b - US$38m) (Based on the trailing twelve months to March 2020).
Therefore, Indus Gas has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.
Above you can see how the current ROCE for Indus Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Indus Gas' ROCE Trend?
On the surface, the trend of ROCE at Indus Gas doesn't inspire confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 5.1%. However it looks like Indus Gas might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
To conclude, we've found that Indus Gas is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 68% 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.
One more thing, we've spotted 1 warning sign facing Indus Gas that you might find interesting.
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