If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Speaking of which, we noticed some great changes in MAX Automation's (ETR:MXHN) returns on capital, so let's have a 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. Analysts use this formula to calculate it for MAX Automation:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = €11m ÷ (€381m - €108m) (Based on the trailing twelve months to June 2024).

So, MAX Automation has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.8%.

See our latest analysis for MAX Automation

Above you can see how the current ROCE for MAX Automation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MAX Automation .

What Does the ROCE Trend For MAX Automation Tell Us?

We're delighted to see that MAX Automation is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.0% on its capital. And unsurprisingly, like most companies trying to break into the black, MAX Automation is utilizing 36% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, MAX Automation has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Long story short, we're delighted to see that MAX Automation's reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.