If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think 29Metals (ASX:29M) 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 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. To calculate this metric for 29Metals, this is the formula:

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

0.08 = AU$89m ÷ (AU$1.3b - AU$190m) (Based on the trailing twelve months to June 2022).

Therefore, 29Metals has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 10.0%.

Check out our latest analysis for 29Metals

In the above chart we have measured 29Metals' 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 29Metals here for free.

What Does the ROCE Trend For 29Metals Tell Us?

When we looked at the ROCE trend at 29Metals, we didn't gain much confidence. Over the last one year, returns on capital have decreased to 8.0% from 13% one year ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for 29Metals. However, despite the promising trends, the stock has fallen 37% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 1 warning sign with 29Metals and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.