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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Avation (LON:AVAP), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Avation:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = US$44m ÷ (US$1.1b - US$133m) (Based on the trailing twelve months to June 2024).
Thus, Avation has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.
View our latest analysis for Avation
Above you can see how the current ROCE for Avation 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 Avation for free.
What Does the ROCE Trend For Avation Tell Us?
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 23% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 4.4%, it's hard to get excited about these developments.
Our Take On Avation's ROCE
In summary, Avation isn't reinvesting funds back into the business and returns aren't growing. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
If you want to know some of the risks facing Avation we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
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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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.