If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at RHI Magnesita (LON:RHIM) and its trend of ROCE, we really liked what we saw.
What is 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. Analysts use this formula to calculate it for RHI Magnesita:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = €261m ÷ (€3.1b - €718m) (Based on the trailing twelve months to June 2020).
Therefore, RHI Magnesita has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Basic Materials industry.
View our latest analysis for RHI Magnesita
In the above chart we have measured RHI Magnesita's prior ROCE against its prior performance, but the future is arguably more important. 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 RHI Magnesita's ROCE Trend?
Investors would be pleased with what's happening at RHI Magnesita. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 77% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
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 RHI Magnesita has. And since the stock has fallen 15% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 4 warning signs facing RHI Magnesita that you might find interesting.
While RHI Magnesita 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. 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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About LSE:RHIM
RHI Magnesita
Develops, produces, sells, installs, and maintains refractory products and systems used in industrial high-temperature processes worldwide.
Very undervalued with solid track record.
