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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Flowserve (NYSE:FLS) 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. Analysts use this formula to calculate it for Flowserve:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$319m ÷ (US$5.6b - US$1.9b) (Based on the trailing twelve months to September 2021).
So, Flowserve has an ROCE of 8.6%. On its own, that's a low figure but it's around the 10% average generated by the Machinery industry.
See our latest analysis for Flowserve
In the above chart we have measured Flowserve's 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 Flowserve here for free.
So How Is Flowserve's ROCE Trending?
Things have been pretty stable at Flowserve, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Flowserve doesn't end up being a multi-bagger in a few years time. This probably explains why Flowserve is paying out 31% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
The Bottom Line
In summary, Flowserve isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.