To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Delegat Group (NZSE:DGL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Delegat Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.093 = NZ$97m ÷ (NZ$1.1b - NZ$59m) (Based on the trailing twelve months to December 2023).

Thus, Delegat Group has an ROCE of 9.3%. On its own, that's a low figure but it's around the 11% average generated by the Beverage industry.

See our latest analysis for Delegat Group

In the above chart we have measured Delegat Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Delegat Group .

How Are Returns Trending?

In terms of Delegat Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Delegat Group's ROCE

Bringing it all together, while we're somewhat encouraged by Delegat Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Delegat Group we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.