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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at secunet Security Networks (ETR:YSN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 secunet Security Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = €38m ÷ (€294m - €93m) (Based on the trailing twelve months to June 2024).
So, secunet Security Networks has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 9.6% it's much better.
View our latest analysis for secunet Security Networks
In the above chart we have measured secunet Security Networks' 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 secunet Security Networks .
So How Is secunet Security Networks' ROCE Trending?
In terms of secunet Security Networks' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last five 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by secunet Security Networks' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 12% 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.
While secunet Security Networks doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for YSN on our platform.