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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Holland Colours (AMS:HOLCO) 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 Holland Colours:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €7.7m ÷ (€78m - €16m) (Based on the trailing twelve months to March 2024).
Thus, Holland Colours has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Chemicals industry.
See our latest analysis for Holland Colours
Historical performance is a great place to start when researching a stock so above you can see the gauge for Holland Colours' ROCE against it's prior returns. If you'd like to look at how Holland Colours has performed in the past in other metrics, you can view this free graph of Holland Colours' past earnings, revenue and cash flow.
So How Is Holland Colours' ROCE Trending?
When we looked at the ROCE trend at Holland Colours, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 12%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Holland Colours' ROCE
To conclude, we've found that Holland Colours is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing Holland Colours we've found 3 warning signs (1 can't be ignored!) that you should be aware of before investing here.