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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Corbion (AMS:CRBN), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Corbion, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = €111m ÷ (€1.7b - €627m) (Based on the trailing twelve months to June 2023).
Therefore, Corbion has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Chemicals industry.
See our latest analysis for Corbion
In the above chart we have measured Corbion's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Corbion.
What Does the ROCE Trend For Corbion Tell Us?
When we looked at the ROCE trend at Corbion, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Corbion. And there could be an opportunity here if other metrics look good too, because the stock has declined 32% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you want to know some of the risks facing Corbion we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
While Corbion may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.