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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Electro Optic Systems Holdings (ASX:EOS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Electro Optic Systems Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = AU$18m ÷ (AU$424m - AU$112m) (Based on the trailing twelve months to June 2024).
So, Electro Optic Systems Holdings has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.3%.
See our latest analysis for Electro Optic Systems Holdings
In the above chart we have measured Electro Optic Systems Holdings' 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 Electro Optic Systems Holdings for free.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 176%. That being said, Electro Optic Systems Holdings raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Electro Optic Systems Holdings' earnings and if they change as a result from the capital raise.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Electro Optic Systems Holdings is reinvesting for growth and has higher sales as a result. But since the stock has dived 74% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.