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There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. And in light of that, the trends we're seeing at Focusrite's (LON:TUNE) look very promising so lets take a look.
What is 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 Focusrite, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = UK£36m ÷ (UK£117m - UK£26m) (Based on the trailing twelve months to August 2021).
So, Focusrite has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 11%.
See our latest analysis for Focusrite
Above you can see how the current ROCE for Focusrite 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 Focusrite here for free.
The Trend Of ROCE
The trends we've noticed at Focusrite are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 39%. Basically the business is earning more per dollar of capital invested and in addition to that, 279% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
In summary, it's great to see that Focusrite can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 518% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Focusrite can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Focusrite, we've spotted 2 warning signs, and 1 of them can't be ignored.