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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Lynch Group Holdings (ASX:LGL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Lynch Group Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = AU$15m ÷ (AU$356m - AU$62m) (Based on the trailing twelve months to June 2024).
Therefore, Lynch Group Holdings has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.2%.
View our latest analysis for Lynch Group Holdings
In the above chart we have measured Lynch Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Lynch Group Holdings .
What The Trend Of ROCE Can Tell Us
In terms of Lynch Group Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.5% over the last four years. 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.
The Bottom Line
To conclude, we've found that Lynch Group Holdings is reinvesting in the business, but returns have been falling. And in the last three years, the stock has given away 28% 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.
If you'd like to know about the risks facing Lynch Group Holdings, we've discovered 1 warning sign that you should be aware of.