If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don't think Westag (FRA:WUG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Westag is:

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

0.041 = €4.9m ÷ (€138m - €19m) (Based on the trailing twelve months to June 2023).

Therefore, Westag has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Building industry average of 13%.

Check out our latest analysis for Westag

Historical performance is a great place to start when researching a stock so above you can see the gauge for Westag's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Westag, check out these free graphs here.

What Does the ROCE Trend For Westag Tell Us?

Over the past five years, Westag's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Westag to be a multi-bagger going forward.

The Key Takeaway

In summary, Westag isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Westag does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Westag isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.