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There are a few key trends to look for if we want to identify the next multi-bagger. 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. So, when we ran our eye over Aristocrat Leisure's (ASX:ALL) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Aristocrat Leisure is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = AU$1.5b ÷ (AU$10b - AU$1.3b) (Based on the trailing twelve months to March 2023).
Thus, Aristocrat Leisure has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 7.0% it's much better.
See our latest analysis for Aristocrat Leisure
Above you can see how the current ROCE for Aristocrat Leisure compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Aristocrat Leisure here for free.
So How Is Aristocrat Leisure's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 88% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Aristocrat Leisure's ROCE
The main thing to remember is that Aristocrat Leisure has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 29% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
If you're still interested in Aristocrat Leisure it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.