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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Superior Group of Companies (NASDAQ:SGC) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Superior Group of Companies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$64m ÷ (US$415m - US$91m) (Based on the trailing twelve months to March 2021).
So, Superior Group of Companies has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 10% generated by the Luxury industry.
Above you can see how the current ROCE for Superior Group of Companies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Superior Group of Companies' ROCE Trending?
Superior Group of Companies is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 101% 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.
The Bottom Line
All in all, it's terrific to see that Superior Group of Companies is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
Superior Group of Companies does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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