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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Electro-Sensors' (NASDAQ:ELSE) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Electro-Sensors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0071 = US$100k ÷ (US$15m - US$859k) (Based on the trailing twelve months to September 2024).
So, Electro-Sensors has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.
See our latest analysis for Electro-Sensors
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Electro-Sensors has performed in the past in other metrics, you can view this free graph of Electro-Sensors' past earnings, revenue and cash flow.
What Can We Tell From Electro-Sensors' ROCE Trend?
Electro-Sensors has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 0.7% on its capital. While returns have increased, the amount of capital employed by Electro-Sensors has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
What We Can Learn From Electro-Sensors' ROCE
In summary, we're delighted to see that Electro-Sensors has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 51% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.