To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Bosun (SZSE:002282), it didn't seem to tick all of these boxes.
What Is 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. To calculate this metric for Bosun, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = CN¥148m ÷ (CN¥3.9b - CN¥254m) (Based on the trailing twelve months to September 2023).
Therefore, Bosun has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bosun's ROCE against it's prior returns. If you're interested in investigating Bosun's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Bosun's ROCE Trend?
There are better returns on capital out there than what we're seeing at Bosun. Over the past five years, ROCE has remained relatively flat at around 4.1% and the business has deployed 69% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Bosun has done well to reduce current liabilities to 6.6% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
Our Take On Bosun's ROCE
In summary, Bosun has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
While Bosun doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
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.
