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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Apollo Pipes (NSE:APOLLOPIPE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 Apollo Pipes:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = ₹566m ÷ (₹4.9b - ₹1.2b) (Based on the trailing twelve months to March 2021).
Therefore, Apollo Pipes has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Apollo Pipes' ROCE against it's prior returns. If you'd like to look at how Apollo Pipes has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Apollo Pipes' ROCE Trending?
When we looked at the ROCE trend at Apollo Pipes, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 15% from 28% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
While returns have fallen for Apollo Pipes in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 200% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we found 2 warning signs for Apollo Pipes (1 is potentially serious) you should be aware of.
While Apollo Pipes isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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