To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at OPENLANE (NYSE:KAR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for OPENLANE:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$249m ÷ (US$4.6b - US$2.6b) (Based on the trailing twelve months to June 2024).

Therefore, OPENLANE has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 10% it's much better.

View our latest analysis for OPENLANE

Above you can see how the current ROCE for OPENLANE 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 OPENLANE for free.

So How Is OPENLANE's ROCE Trending?

OPENLANE has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 40%. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, OPENLANE appears to been achieving more with less, since the business is using 45% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

From what we've seen above, OPENLANE has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.