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To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Marriott International (NASDAQ:MAR), 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 Marriott International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$2.7b ÷ (US$25b - US$6.9b) (Based on the trailing twelve months to June 2022).
So, Marriott International has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 10% it's much better.
Check out our latest analysis for Marriott International
In the above chart we have measured Marriott International's 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Marriott International's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Marriott International to be a multi-bagger going forward.
In Conclusion...
In summary, Marriott International isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing, we've spotted 1 warning sign facing Marriott International that you might find interesting.
While Marriott International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.