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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Theon International's (AMS:THEON) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Theon International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = €82m ÷ (€323m - €85m) (Based on the trailing twelve months to September 2024).
So, Theon International has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Check out our latest analysis for Theon International
In the above chart we have measured Theon International's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Theon International .
How Are Returns Trending?
The trends we've noticed at Theon International are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 34%. Basically the business is earning more per dollar of capital invested and in addition to that, 1,092% more capital is being employed now too. So we're very much inspired by what we're seeing at Theon International thanks to its ability to profitably reinvest capital.
One more thing to note, Theon International has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line On Theon International's ROCE
To sum it up, Theon International has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 53% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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.