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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Boyd Group Services (TSE:BYD) 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)?
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 Boyd Group Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$128m ÷ (US$2.5b - US$448m) (Based on the trailing twelve months to September 2024).
So, Boyd Group Services has an ROCE of 6.2%. On its own, that's a low figure but it's around the 6.9% average generated by the Commercial Services industry.
Check out our latest analysis for Boyd Group Services
Above you can see how the current ROCE for Boyd Group Services 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 Boyd Group Services for free.
How Are Returns Trending?
In terms of Boyd Group Services' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.2% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.
What We Can Learn From Boyd Group Services' ROCE
Bringing it all together, while we're somewhat encouraged by Boyd Group Services' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 4.0% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.