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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Marco Polo Marine (SGX:5LY) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Marco Polo Marine:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = S$31m ÷ (S$239m - S$39m) (Based on the trailing twelve months to March 2024).
So, Marco Polo Marine has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Shipping industry.
Check out our latest analysis for Marco Polo Marine
Above you can see how the current ROCE for Marco Polo Marine compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Marco Polo Marine for free.
What Does the ROCE Trend For Marco Polo Marine Tell Us?
The fact that Marco Polo Marine is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. Not only that, but the company is utilizing 83% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
Long story short, we're delighted to see that Marco Polo Marine's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 230% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.