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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. 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 System1 Group (LON:SYS1), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. To calculate this metric for System1 Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = UK£1.7m ÷ (UK£16m - UK£5.9m) (Based on the trailing twelve months to September 2023).
Therefore, System1 Group has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Media industry.
Check out our latest analysis for System1 Group
Above you can see how the current ROCE for System1 Group 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 System1 Group for free.
The Trend Of ROCE
On the surface, the trend of ROCE at System1 Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 27% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On System1 Group's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for System1 Group. And the stock has done incredibly well with a 118% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you'd like to know more about System1 Group, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.