To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Axon Enterprise (NASDAQ:AXON) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Axon Enterprise is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0055 = US$6.2m ÷ (US$1.4b - US$256m) (Based on the trailing twelve months to December 2020).
Therefore, Axon Enterprise has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.5%.
In the above chart we have measured Axon Enterprise's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Axon Enterprise here for free.
So How Is Axon Enterprise's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 487%. Usually this isn't ideal, but given Axon Enterprise conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Axon Enterprise's earnings and if they change as a result from the capital raise.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Axon Enterprise. And the stock has done incredibly well with a 617% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know about the risks facing Axon Enterprise, we've discovered 2 warning signs that you should be aware of.
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