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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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Exchange Income (TSE:EIF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Exchange Income is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = CA$318m ÷ (CA$4.6b - CA$651m) (Based on the trailing twelve months to December 2024).
So, Exchange Income has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.0%.
See our latest analysis for Exchange Income
Above you can see how the current ROCE for Exchange Income compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Exchange Income .
The Trend Of ROCE
The returns on capital haven't changed much for Exchange Income in recent years. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 99% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
Long story short, while Exchange Income has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 163% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know about the risks facing Exchange Income, we've discovered 2 warning signs that you should be aware of.