To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating AP Oil International (SGX:5AU), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for AP Oil International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = S$1.1m ÷ (S$76m - S$9.6m) (Based on the trailing twelve months to June 2020).
Thus, AP Oil International has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 3.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for AP Oil International's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AP Oil International, check out these free graphs here.
How Are Returns Trending?
On the surface, the trend of ROCE at AP Oil International doesn't inspire confidence. To be more specific, ROCE has fallen from 8.3% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Bringing it all together, while we're somewhat encouraged by AP Oil International's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think AP Oil International has the makings of a multi-bagger.
AP Oil International does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.
While AP Oil International 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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