There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at InnoTec TSS (FRA:TSS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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 InnoTec TSS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €15m ÷ (€117m - €14m) (Based on the trailing twelve months to December 2022).
So, InnoTec TSS has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 14%.
See our latest analysis for InnoTec TSS
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how InnoTec TSS has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Things have been pretty stable at InnoTec TSS, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if InnoTec TSS doesn't end up being a multi-bagger in a few years time.
In Conclusion...
We can conclude that in regards to InnoTec TSS' returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 21% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing: We've identified 3 warning signs with InnoTec TSS (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
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.