If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Eastern (NASDAQ:EML), it didn't seem to tick all of these boxes.
Understanding 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 Eastern is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$19m ÷ (US$281m - US$43m) (Based on the trailing twelve months to April 2021).
Thus, Eastern has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.4%.
Check out our latest analysis for Eastern
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eastern, check out these free graphs here.
The Trend Of ROCE
The returns on capital haven't changed much for Eastern in recent years. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 123% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
In conclusion, Eastern has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing to note, we've identified 3 warning signs with Eastern and understanding them should be part of your investment process.
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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Access Free AnalysisThis 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 NasdaqGM:EML
Eastern
Designs, manufactures, and sells engineered solutions to industrial markets in the United States and internationally.
Flawless balance sheet with proven track record and pays a dividend.
