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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Asseco Poland (WSE:ACP) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Asseco Poland, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = zł1.3b ÷ (zł17b - zł4.6b) (Based on the trailing twelve months to March 2021).
Therefore, Asseco Poland has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Software industry average it falls behind.
Above you can see how the current ROCE for Asseco Poland compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Asseco Poland here for free.
What Can We Tell From Asseco Poland's ROCE Trend?
The trends we've noticed at Asseco Poland are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 28% 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.
What We Can Learn From Asseco Poland's ROCE
To sum it up, Asseco Poland has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 91% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
While Asseco Poland looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ACP is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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