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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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Summit Midstream (NYSE:SMC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Summit Midstream is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$70m ÷ (US$2.0b - US$231m) (Based on the trailing twelve months to September 2024).
Thus, Summit Midstream has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.
View our latest analysis for Summit Midstream
Historical performance is a great place to start when researching a stock so above you can see the gauge for Summit Midstream's ROCE against it's prior returns. If you're interested in investigating Summit Midstream's past further, check out this free graph covering Summit Midstream's past earnings, revenue and cash flow.
The Trend Of ROCE
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 30% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 4.0%, it's hard to get excited about these developments.
What We Can Learn From Summit Midstream's ROCE
Overall, we're not ecstatic to see Summit Midstream reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Summit Midstream has the makings of a multi-bagger.