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. However, after investigating Stille (STO:STIL), we don't think it's current trends fit the mold of a multi-bagger.
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 Stille:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = kr7.7m ÷ (kr157m - kr25m) (Based on the trailing twelve months to September 2020).
Thus, Stille has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 11%.
View our latest analysis for Stille
Historical performance is a great place to start when researching a stock so above you can see the gauge for Stille's ROCE against it's prior returns. If you're interested in investigating Stille's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Stille doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
From the above analysis, we find it rather worrisome that returns on capital and sales for Stille have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 507%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a final note, we found 3 warning signs for Stille (1 doesn't sit too well with us) you should be aware of.
While Stille 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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This article by Simply Wall St is general in nature. 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.
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About OM:STIL
Stille
Manufactures and markets surgical instruments in Sweden and internationally.
Flawless balance sheet with reasonable growth potential.
