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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at G8 Education (ASX:GEM), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on G8 Education is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = AU$129m ÷ (AU$1.9b - AU$297m) (Based on the trailing twelve months to June 2024).
So, G8 Education has an ROCE of 7.9%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
See our latest analysis for G8 Education
Above you can see how the current ROCE for G8 Education 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 G8 Education .
How Are Returns Trending?
Over the past five years, G8 Education's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at G8 Education in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why G8 Education is paying out 59% 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.
What We Can Learn From G8 Education's ROCE
We can conclude that in regards to G8 Education's returns on capital employed and the trends, there isn't much change to report on. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know about the risks facing G8 Education, we've discovered 1 warning sign that you should be aware of.