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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Babcock International Group (LON:BAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Babcock International Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = UK£155m ÷ (UK£7.5b - UK£2.0b) (Based on the trailing twelve months to March 2020).
Therefore, Babcock International Group has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 12%.
Check out our latest analysis for Babcock International Group
Above you can see how the current ROCE for Babcock International Group 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.
The Trend Of ROCE
On the surface, the trend of ROCE at Babcock International Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.8% from 8.0% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Babcock International Group's ROCE
To conclude, we've found that Babcock International Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 66% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.