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If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at Somero Enterprises (LON:SOM), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Somero Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = US$36m ÷ (US$91m - US$13m) (Based on the trailing twelve months to June 2023).
Thus, Somero Enterprises has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Machinery industry average of 14%.
View our latest analysis for Somero Enterprises
In the above chart we have measured Somero Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Somero Enterprises here for free.
How Are Returns Trending?
Somero Enterprises deserves to be commended in regards to it's returns. The company has employed 58% more capital in the last five years, and the returns on that capital have remained stable at 47%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Somero Enterprises can keep this up, we'd be very optimistic about its future.
The Bottom Line
In short, we'd argue Somero Enterprises has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last five years, the stock hasn't provided much growth to shareholders in the way of total returns. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
If you'd like to know about the risks facing Somero Enterprises, we've discovered 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.