Is Glenveagh Properties (ISE:GVR) A Future Multi-bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Glenveagh Properties' (ISE:GVR) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Glenveagh Properties:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0086 = €7.3m ÷ (€989m - €145m) (Based on the trailing twelve months to June 2020).

Thus, Glenveagh Properties has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 8.2%.

View our latest analysis for Glenveagh Properties

Above you can see how the current ROCE for Glenveagh Properties 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 Glenveagh Properties.

What Does the ROCE Trend For Glenveagh Properties Tell Us?

We're delighted to see that Glenveagh Properties is reaping rewards from its investments and has now broken into profitability. The company was generating losses two years ago, but has managed to turn it around and as we saw earlier is now earning 0.9%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 15% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

To sum it up, Glenveagh Properties is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 27% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 1 warning sign facing Glenveagh Properties that you might find interesting.

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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