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There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Basic-Fit (AMS:BFIT), 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 Basic-Fit, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = €49m ÷ (€2.9b - €455m) (Based on the trailing twelve months to December 2022).
Therefore, Basic-Fit has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.4%.
Check out our latest analysis for Basic-Fit
In the above chart we have measured Basic-Fit's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
When we looked at the ROCE trend at Basic-Fit, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.1% from 3.3% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Basic-Fit is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Basic-Fit could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Basic-Fit isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.