If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Encore Wire's (NASDAQ:WIRE) look very promising so lets take a look.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Encore Wire, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = US$548m ÷ (US$1.4b - US$152m) (Based on the trailing twelve months to September 2021).
Therefore, Encore Wire has an ROCE of 44%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.
In the above chart we have measured Encore Wire's 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 Encore Wire.
What Can We Tell From Encore Wire's ROCE Trend?
We like the trends that we're seeing from Encore Wire. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 44%. The amount of capital employed has increased too, by 110%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In summary, it's great to see that Encore Wire can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing Encore Wire that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.