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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of ADF Group (TSE:DRX) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for ADF Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = CA$75m ÷ (CA$287m - CA$81m) (Based on the trailing twelve months to July 2024).
Therefore, ADF Group has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 3.4% earned by companies in a similar industry.
Check out our latest analysis for ADF Group
In the above chart we have measured ADF Group'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 ADF Group for free.
The Trend Of ROCE
The trends we've noticed at ADF Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 37%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 60%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
In summary, it's great to see that ADF Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 764% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for DRX on our platform that is definitely worth checking out.