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To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. With that in mind, we’ve noticed some promising trends at Chargers (EPA: CRI) So let’s look a little deeper.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Chargeurs, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.11 = € 69m ÷ (€ 884m – € 274m) (Based on the last twelve months up to December 2020).
Therefore, Chargeurs has a ROCE of 11%. This is a fairly standard return and it is in line with the industry average of 11%.
Discover our latest analysis for Chargeurs
In the graph above, we’ve measured Chargeurs’ past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Chargers.
How are the returns evolving?
Investors would be delighted with what is happening at Chargeurs. Over the past five years, return on capital employed has increased substantially to 11%. Basically the business earns more per dollar of capital invested and on top of that 106% more capital is also used. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
On a related note, the ratio of the company’s current liabilities to total assets declined to 31%, fundamentally reducing its funding from short-term creditors or suppliers. So this improvement in ROCE came from the underlying economics of the business, which is great to see.
The bottom line
Overall, it’s great to see Chargeurs reaping the rewards of past investments and growing its capital base. Given that the stock has returned 140% to shareholders over the past five years, it looks like investors are recognizing these changes. So, given that the stock has proven to have some promising trends, it is worth doing more research on the company to see if these trends are likely to continue.
Like most businesses, Chargeurs involves certain risks, and we have found 3 warning signs that you need to be aware of.
While Chargeurs does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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