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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So, when we ran our eye over Compass Group's (LON:CPG) trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Compass Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$2.9b ÷ (US$24b - US$10b) (Based on the trailing twelve months to September 2024).
Therefore, Compass Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 8.3%.
See our latest analysis for Compass Group
In the above chart we have measured Compass Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Compass Group .
What Does the ROCE Trend For Compass Group Tell Us?
Compass Group deserves to be commended in regards to it's returns. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 20%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Compass Group can keep this up, we'd be very optimistic about its future.
On a side note, Compass Group's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On Compass Group's ROCE
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 176% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.