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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in AVADA Group's (ASX:AVD) returns on capital, so let's have a look.
What Is 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. The formula for this calculation on AVADA Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = AU$6.1m ÷ (AU$131m - AU$30m) (Based on the trailing twelve months to June 2024).
Therefore, AVADA Group has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.4%.
Check out our latest analysis for AVADA Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for AVADA Group's ROCE against it's prior returns. If you'd like to look at how AVADA Group has performed in the past in other metrics, you can view this free graph of AVADA Group's past earnings, revenue and cash flow.
What Can We Tell From AVADA Group's ROCE Trend?
AVADA Group has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 6.0% on its capital. And unsurprisingly, like most companies trying to break into the black, AVADA Group is utilizing 48% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On AVADA Group's ROCE
In summary, it's great to see that AVADA Group has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 45% over the last three years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
AVADA Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...
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.