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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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 investigating Gooch & Housego (LON:GHH), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
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 Gooch & Housego:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = UK£8.5m ÷ (UK£178m - UK£24m) (Based on the trailing twelve months to September 2020).
So, Gooch & Housego has an ROCE of 5.5%. In absolute terms, that's a low return but it's around the Electronic industry average of 6.6%.
View our latest analysis for Gooch & Housego
In the above chart we have measured Gooch & Housego's 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 Gooch & Housego here for free.
What Does the ROCE Trend For Gooch & Housego Tell Us?
In terms of Gooch & Housego's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.5%. However it looks like Gooch & Housego might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Gooch & Housego's ROCE
To conclude, we've found that Gooch & Housego is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 45% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know about the risks facing Gooch & Housego, we've discovered 1 warning sign that you should be aware of.