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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Allison Transmission Holdings (NYSE:ALSN) 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. The formula for this calculation on Allison Transmission Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$776m ÷ (US$4.6b - US$487m) (Based on the trailing twelve months to September 2022).
Thus, Allison Transmission Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 11% it's much better.
See our latest analysis for Allison Transmission Holdings
In the above chart we have measured Allison Transmission 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 Allison Transmission Holdings here for free.
So How Is Allison Transmission Holdings' ROCE Trending?
Over the past five years, Allison Transmission Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Allison Transmission Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
What We Can Learn From Allison Transmission Holdings' ROCE
We can conclude that in regards to Allison Transmission Holdings' returns on capital employed and the trends, there isn't much change to report on. Unsurprisingly, the stock has only gained 1.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Allison Transmission Holdings (including 1 which doesn't sit too well with us) .