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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at RATIONAL's (ETR:RAA) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on RATIONAL is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = €306m ÷ (€1.0b - €210m) (Based on the trailing twelve months to September 2024).
So, RATIONAL has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.
Check out our latest analysis for RATIONAL
Above you can see how the current ROCE for RATIONAL 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 analyst report for RATIONAL .
What Does the ROCE Trend For RATIONAL Tell Us?
We'd be pretty happy with returns on capital like RATIONAL. Over the past five years, ROCE has remained relatively flat at around 38% and the business has deployed 59% more capital into its operations. Now considering ROCE is an attractive 38%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From RATIONAL's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 34% over the last five years for shareholders who have owned the stock in this period. So to determine if RATIONAL is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for RAA that compares the share price and estimated value.