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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at DocCheck (ETR:AJ91), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for DocCheck, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = €3.7m ÷ (€56m - €14m) (Based on the trailing twelve months to June 2024).
Thus, DocCheck has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Healthcare Services industry average of 9.9%.
Check out our latest analysis for DocCheck
Historical performance is a great place to start when researching a stock so above you can see the gauge for DocCheck's ROCE against it's prior returns. If you'd like to look at how DocCheck has performed in the past in other metrics, you can view this free graph of DocCheck's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of DocCheck's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
We're a bit apprehensive about DocCheck because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 41% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for DocCheck (of which 1 is a bit unpleasant!) that you should know about.