If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Cobram Estate Olives (ASX:CBO) so let's look a bit deeper.

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 Cobram Estate Olives, this is the formula:

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

0.05 = AU$27m ÷ (AU$616m - AU$73m) (Based on the trailing twelve months to December 2023).

So, Cobram Estate Olives has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

Check out our latest analysis for Cobram Estate Olives

Above you can see how the current ROCE for Cobram Estate Olives 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 Cobram Estate Olives for free.

So How Is Cobram Estate Olives' ROCE Trending?

Cobram Estate Olives has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.0% on its capital. In addition to that, Cobram Estate Olives is employing 88% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Long story short, we're delighted to see that Cobram Estate Olives' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 10% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Cobram Estate Olives and understanding it should be part of your investment process.