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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at ePlus (NASDAQ:PLUS), we liked what we saw.
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. Analysts use this formula to calculate it for ePlus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$160m ÷ (US$1.6b - US$794m) (Based on the trailing twelve months to December 2022).
Therefore, ePlus has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Electronic industry average of 14%.
See our latest analysis for ePlus
Above you can see how the current ROCE for ePlus compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ePlus here for free.
So How Is ePlus' ROCE Trending?
In terms of ePlus' history of ROCE, it's quite impressive. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 98% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
On a side note, ePlus' current liabilities are still rather high at 50% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From ePlus' ROCE
In summary, we're delighted to see that ePlus has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last five years, the stock has only delivered a 1.5% return to shareholders who held over that period. So to determine if ePlus is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.