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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Exco Technologies (TSE:XTC) and its ROCE trend, we weren't exactly thrilled.
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 Exco Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CA$51m ÷ (CA$607m - CA$95m) (Based on the trailing twelve months to September 2024).
So, Exco Technologies has an ROCE of 9.9%. Even though it's in line with the industry average of 10%, it's still a low return by itself.
Check out our latest analysis for Exco Technologies
Above you can see how the current ROCE for Exco Technologies 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 Exco Technologies for free.
The Trend Of ROCE
In terms of Exco Technologies' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 45% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Exco Technologies' ROCE
As we've seen above, Exco Technologies' returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 16% 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.
One final note, you should learn about the 2 warning signs we've spotted with Exco Technologies (including 1 which is concerning) .
While Exco Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.