There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Carlo Gavazzi Holding's (VTX:GAV) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Carlo Gavazzi Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = CHF39m ÷ (CHF185m - CHF45m) (Based on the trailing twelve months to March 2023).
Thus, Carlo Gavazzi Holding has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Check out our latest analysis for Carlo Gavazzi Holding
Above you can see how the current ROCE for Carlo Gavazzi Holding 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.
So How Is Carlo Gavazzi Holding's ROCE Trending?
The trends we've noticed at Carlo Gavazzi Holding are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 28%. The amount of capital employed has increased too, by 31%. So we're very much inspired by what we're seeing at Carlo Gavazzi Holding thanks to its ability to profitably reinvest capital.
The Bottom Line On Carlo Gavazzi Holding's ROCE
All in all, it's terrific to see that Carlo Gavazzi Holding is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Carlo Gavazzi Holding does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...