To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Indus Gas (LON:INDI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Indus Gas:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.038 = US$46m ÷ (US$1.2b - US$28m) (Based on the trailing twelve months to September 2021).

Therefore, Indus Gas has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.7%.

View our latest analysis for Indus Gas

Above you can see how the current ROCE for Indus Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Indus Gas' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.6%, but since then they've fallen to 3.8%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Indus Gas' ROCE

Bringing it all together, while we're somewhat encouraged by Indus Gas' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 35% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing: We've identified 2 warning signs with Indus Gas (at least 1 which doesn't sit too well with us) , and understanding them would certainly be useful.