To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at Italtile's (JSE:ITE) ROCE trend, we were very happy with what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Italtile is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = R2.3b ÷ (R9.8b - R935m) (Based on the trailing twelve months to June 2023).
So, Italtile has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
View our latest analysis for Italtile
Historical performance is a great place to start when researching a stock so above you can see the gauge for Italtile's ROCE against it's prior returns. If you're interested in investigating Italtile's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Italtile's ROCE Trending?
Italtile deserves to be commended in regards to it's returns. The company has employed 56% more capital in the last five years, and the returns on that capital have remained stable at 26%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
The Key Takeaway
In summary, we're delighted to see that Italtile has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 6.3% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
On a final note, we've found 1 warning sign for Italtile that we think you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.