There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at WW International's (NASDAQ:WW) ROCE trend, we were pretty happy with what we saw.
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 WW International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$217m ÷ (US$1.4b - US$229m) (Based on the trailing twelve months to January 2022).
So, WW International has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Consumer Services industry.
Above you can see how the current ROCE for WW International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering WW International here for free.
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 23% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that WW International has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
To sum it up, WW International has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 43%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
If you'd like to know more about WW International, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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.