If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Trimble (NASDAQ:TRMB) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Trimble, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.074 = US$567m ÷ (US$9.5b - US$1.8b) (Based on the trailing twelve months to December 2023).

So, Trimble has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

Above you can see how the current ROCE for Trimble compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Trimble for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Trimble. The company has consistently earned 7.4% for the last five years, and the capital employed within the business has risen 63% in that time. 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.

The Bottom Line

In conclusion, Trimble has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 59% 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.

If you want to know some of the risks facing Trimble we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Trimble isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.