In This Article:
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Cascades (TSE:CAS), we don't think it's current trends fit the mold of a multi-bagger.
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 Cascades is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CA$179m ÷ (CA$4.9b - CA$971m) (Based on the trailing twelve months to September 2024).
Thus, Cascades has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.
View our latest analysis for Cascades
In the above chart we have measured Cascades' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Cascades for free.
So How Is Cascades' ROCE Trending?
Over the past five years, Cascades' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Cascades to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Cascades has been paying out a decent 41% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On Cascades' ROCE
In summary, Cascades isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 30% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing: We've identified 2 warning signs with Cascades (at least 1 which is significant) , and understanding these would certainly be useful.