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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Acuity Brands (NYSE:AYI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Acuity Brands:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$457m ÷ (US$3.6b - US$695m) (Based on the trailing twelve months to November 2021).
So, Acuity Brands has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 9.3% it's much better.
View our latest analysis for Acuity Brands
Above you can see how the current ROCE for Acuity Brands 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 Acuity Brands here for free.
What The Trend Of ROCE Can Tell Us
In terms of Acuity Brands' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. However it looks like Acuity Brands might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
What We Can Learn From Acuity Brands' ROCE
Bringing it all together, while we're somewhat encouraged by Acuity Brands' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you're still interested in Acuity Brands it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.