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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at James Fisher and Sons (LON:FSJ) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on James Fisher and Sons is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = UK£27m ÷ (UK£568m - UK£375m) (Based on the trailing twelve months to June 2024).
Thus, James Fisher and Sons has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Infrastructure industry average of 12% it's much better.
See our latest analysis for James Fisher and Sons
In the above chart we have measured James Fisher and Sons' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for James Fisher and Sons .
What Can We Tell From James Fisher and Sons' ROCE Trend?
We're pretty happy with how the ROCE has been trending at James Fisher and Sons. The figures show that over the last five years, returns on capital have grown by 23%. The company is now earning UK£0.1 per dollar of capital employed. In regards to capital employed, James Fisher and Sons appears to been achieving more with less, since the business is using 62% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 66% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.
Our Take On James Fisher and Sons' ROCE
In the end, James Fisher and Sons has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 82% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.