There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at InnoTec TSS (FRA:TSS) 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)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for InnoTec TSS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €15m ÷ (€110m - €16m) (Based on the trailing twelve months to June 2022).
Therefore, InnoTec TSS has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Building industry.
View our latest analysis for InnoTec TSS
Historical performance is a great place to start when researching a stock so above you can see the gauge for InnoTec TSS' ROCE against it's prior returns. If you're interested in investigating InnoTec TSS' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Things have been pretty stable at InnoTec TSS, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if InnoTec TSS doesn't end up being a multi-bagger in a few years time.
Our Take On InnoTec TSS' ROCE
In a nutshell, InnoTec TSS has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think InnoTec TSS has the makings of a multi-bagger.
If you want to know some of the risks facing InnoTec TSS we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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