To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at EST Tools (SZSE:300488) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for EST Tools, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = CN¥108m ÷ (CN¥1.6b - CN¥129m) (Based on the trailing twelve months to September 2023).
Therefore, EST Tools has an ROCE of 7.6%. On its own that's a low return, but compared to the average of 6.0% generated by the Machinery industry, it's much better.
Check out our latest analysis for EST Tools
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how EST Tools has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From EST Tools' ROCE Trend?
We weren't thrilled with the trend because EST Tools' ROCE has reduced by 43% over the last five years, while the business employed 42% more capital. That being said, EST Tools raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. EST Tools probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On EST Tools' ROCE
In summary, EST Tools is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
EST Tools does have some risks though, and we've spotted 2 warning signs for EST Tools that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.