To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at X5 Retail Group (LON:FIVE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 X5 Retail Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = ₽119b ÷ (₽1.3t - ₽484b) (Based on the trailing twelve months to March 2022).

Thus, X5 Retail Group has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 10% it's much better.

View our latest analysis for X5 Retail Group

In the above chart we have measured X5 Retail Group'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.

How Are Returns Trending?

In terms of X5 Retail Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 21% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On X5 Retail Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that X5 Retail Group is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 93% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

If you want to continue researching X5 Retail Group, you might be interested to know about the 2 warning signs that our analysis has discovered.