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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Angi (NASDAQ:ANGI), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Angi is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0049 = US$10m ÷ (US$2.3b - US$247m) (Based on the trailing twelve months to March 2021).
Therefore, Angi has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 10%.
See our latest analysis for Angi
In the above chart we have measured Angi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Angi here for free.
What Does the ROCE Trend For Angi Tell Us?
In terms of Angi's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.5% from 2.8% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Angi has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Angi is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.