If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Northern Bear (LON:NTBR), it didn't seem to tick all of these boxes.

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. To calculate this metric for Northern Bear, this is the formula:

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

0.10 = UK£2.5m ÷ (UK£39m - UK£15m) (Based on the trailing twelve months to March 2022).

Thus, Northern Bear has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Consumer Durables industry average it falls behind.

See our latest analysis for Northern Bear

Historical performance is a great place to start when researching a stock so above you can see the gauge for Northern Bear's ROCE against it's prior returns. If you're interested in investigating Northern Bear's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Northern Bear's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Northern Bear to be a multi-bagger going forward.

The Bottom Line

In a nutshell, Northern Bear has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 2 warning signs with Northern Bear and understanding them should be part of your investment process.

While Northern Bear may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.