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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Orascom Development Holding (VTX:ODHN) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Orascom Development Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CHF109m ÷ (CHF1.8b - CHF621m) (Based on the trailing twelve months to June 2023).
Thus, Orascom Development Holding has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.4% generated by the Hospitality industry, it's much better.
See our latest analysis for Orascom Development Holding
Above you can see how the current ROCE for Orascom Development Holding 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 Orascom Development Holding here for free.
What The Trend Of ROCE Can Tell Us
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 9.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 70%. So we're very much inspired by what we're seeing at Orascom Development Holding thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 34%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
In Conclusion...
To sum it up, Orascom Development Holding has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 69% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.