There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Treasure (OB:TRE) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Treasure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = US$214m ÷ (US$764m - US$19k) (Based on the trailing twelve months to December 2020).
So, Treasure has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Logistics industry average of 12%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Treasure's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Treasure is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 28% which is a sight for sore eyes. In addition to that, Treasure is employing 28% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Treasure's ROCE
Long story short, we're delighted to see that Treasure's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 31% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Treasure does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Treasure is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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