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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Canterbury Park Holding (NASDAQ:CPHC), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Canterbury Park Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = US$8.5m ÷ (US$102m - US$13m) (Based on the trailing twelve months to June 2023).
Thus, Canterbury Park Holding has an ROCE of 9.6%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.
View our latest analysis for Canterbury Park Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for Canterbury Park Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Canterbury Park Holding, check out these free graphs here.
So How Is Canterbury Park Holding's ROCE Trending?
There are better returns on capital out there than what we're seeing at Canterbury Park Holding. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 94% 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.
On a side note, Canterbury Park Holding has done well to reduce current liabilities to 13% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
In Conclusion...
As we've seen above, Canterbury Park Holding's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 40% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.