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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating BATM Advanced Communications (LON:BVC), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for BATM Advanced Communications, this is the formula:

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

0.013 = US$1.6m ÷ (US$170m - US$43m) (Based on the trailing twelve months to June 2024).

Thus, BATM Advanced Communications has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 12%.

Check out our latest analysis for BATM Advanced Communications

Above you can see how the current ROCE for BATM Advanced Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for BATM Advanced Communications .

What Does the ROCE Trend For BATM Advanced Communications Tell Us?

On the surface, the trend of ROCE at BATM Advanced Communications doesn't inspire confidence. Over the last five years, returns on capital have decreased to 1.3% from 2.2% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by BATM Advanced Communications' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 56% in the last five years. Therefore based on the analysis done in this article, we don't think BATM Advanced Communications has the makings of a multi-bagger.