South Ocean Holdings (JSE:SOH) Has Some Way To Go To Become A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 South Ocean Holdings (JSE:SOH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 South Ocean Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.077 = R58m ÷ (R1.2b - R464m) (Based on the trailing twelve months to June 2023).

So, South Ocean Holdings has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 37%.

View our latest analysis for South Ocean Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for South Ocean Holdings' ROCE against it's prior returns. If you're interested in investigating South Ocean Holdings' past further, check out this free graph covering South Ocean Holdings' past earnings, revenue and cash flow.

What Can We Tell From South Ocean Holdings' ROCE Trend?

In terms of South Ocean Holdings' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.7% for the last five years, and the capital employed within the business has risen 37% 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, South Ocean Holdings has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 187% gain to shareholders who have held over the last five years. 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: We've identified 4 warning signs with South Ocean Holdings (at least 1 which is significant) , and understanding these would certainly be useful.

While South Ocean Holdings 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. 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.