If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Australian Clinical Labs (ASX:ACL) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Australian Clinical Labs:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = AU$116m ÷ (AU$596m - AU$192m) (Based on the trailing twelve months to December 2022).
Therefore, Australian Clinical Labs has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.
View our latest analysis for Australian Clinical Labs
In the above chart we have measured Australian Clinical Labs' 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 Australian Clinical Labs here for free.
What Does the ROCE Trend For Australian Clinical Labs Tell Us?
We're delighted to see that Australian Clinical Labs is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 29% on its capital. And unsurprisingly, like most companies trying to break into the black, Australian Clinical Labs is utilizing 529% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Key Takeaway
Overall, Australian Clinical Labs gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 15% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.