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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Verde Agritech's (TSE:NPK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Verde Agritech is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CA$1.3m ÷ (CA$28m - CA$2.8m) (Based on the trailing twelve months to September 2020).
Therefore, Verde Agritech has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Verde Agritech's ROCE against it's prior returns. If you're interested in investigating Verde Agritech's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Verde Agritech Tell Us?
We're delighted to see that Verde Agritech is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.1% on its capital. While returns have increased, the amount of capital employed by Verde Agritech has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On Verde Agritech's ROCE
In summary, we're delighted to see that Verde Agritech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 714% 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 Verde Agritech can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Verde Agritech, we've discovered 3 warning signs that you should be aware of.
While Verde Agritech 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.
This article by Simply Wall St is general in nature. 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.
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