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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Algoma Central (TSE:ALC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Algoma Central, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CA$75m ÷ (CA$1.5b - CA$190m) (Based on the trailing twelve months to December 2024).
So, Algoma Central has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 9.3%.
View our latest analysis for Algoma Central
Above you can see how the current ROCE for Algoma Central compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Algoma Central .
What Does the ROCE Trend For Algoma Central Tell Us?
There are better returns on capital out there than what we're seeing at Algoma Central. Over the past five years, ROCE has remained relatively flat at around 5.6% and the business has deployed 35% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Algoma Central's ROCE
In summary, Algoma Central has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 153% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 2 warning signs for Algoma Central you'll probably want to know about.