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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Casella Waste Systems (NASDAQ:CWST) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Casella Waste Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$81m ÷ (US$1.3b - US$178m) (Based on the trailing twelve months to September 2021).
Therefore, Casella Waste Systems has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.8%.
See our latest analysis for Casella Waste Systems
In the above chart we have measured Casella Waste Systems' 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 Casella Waste Systems here for free.
What Does the ROCE Trend For Casella Waste Systems Tell Us?
In terms of Casella Waste Systems' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 99% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Casella Waste Systems' ROCE
Long story short, while Casella Waste Systems has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 573% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Casella Waste Systems does have some risks though, and we've spotted 2 warning signs for Casella Waste Systems that you might be interested in.