If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Securitas (STO:SECU B), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Securitas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = kr8.0b ÷ (kr117b - kr35b) (Based on the trailing twelve months to March 2023).
Therefore, Securitas has an ROCE of 9.7%. Even though it's in line with the industry average of 9.7%, it's still a low return by itself.
View our latest analysis for Securitas
In the above chart we have measured Securitas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Securitas.
What The Trend Of ROCE Can Tell Us
In terms of Securitas' historical ROCE trend, it doesn't exactly demand attention. The company has employed 123% more capital in the last five years, and the returns on that capital have remained stable at 9.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Securitas' ROCE
Long story short, while Securitas has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Securitas has the makings of a multi-bagger.
If you want to know some of the risks facing Securitas we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.
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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About OM:SECU B
Securitas
Provides security services in North America, Europe, Latin America, Africa, the Middle East, Asia, and Australia.
Good value with proven track record and pays a dividend.
