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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Brook Crompton Holdings (SGX:AWC) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Brook Crompton Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = S$2.3m ÷ (S$68m - S$20m) (Based on the trailing twelve months to June 2024).
Therefore, Brook Crompton Holdings has an ROCE of 4.7%. On its own, that's a low figure but it's around the 5.8% average generated by the Trade Distributors industry.
See our latest analysis for Brook Crompton Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Brook Crompton Holdings' ROCE against it's prior returns. If you'd like to look at how Brook Crompton Holdings has performed in the past in other metrics, you can view this free graph of Brook Crompton Holdings' past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Brook Crompton Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like Brook Crompton Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 Brook Crompton Holdings' ROCE
Bringing it all together, while we're somewhat encouraged by Brook Crompton Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 30% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.