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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Avi-Tech Holdings (SGX:1R6), 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 Avi-Tech Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = S$4.1m ÷ (S$60m - S$5.1m) (Based on the trailing twelve months to December 2023).
So, Avi-Tech Holdings has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 6.7%.
See our latest analysis for Avi-Tech Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Avi-Tech Holdings' ROCE against it's prior returns. If you'd like to look at how Avi-Tech Holdings has performed in the past in other metrics, you can view this free graph of Avi-Tech Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
Over the past five years, Avi-Tech Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Avi-Tech Holdings to be a multi-bagger going forward.
The Bottom Line
In summary, Avi-Tech Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Avi-Tech Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...
While Avi-Tech Holdings 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.