What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Therefore, when we looked at ROCE trends at Page group (LON:PAGE), we liked what we saw.
Understanding return on capital employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on PageGroup is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.39 = £169m ÷ (£724m – £290m) (Based on the last twelve months to December 2021).
Thereby, PageGroup has a ROCE of 39%. This is a fantastic return and not only that, it exceeds the 13% average earned by companies in a similar industry.
In the chart above, we measured PageGroup’s past ROCE against its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is the trend of PageGroup’s ROCE?
In terms of PageGroup’s ROCE history, that’s pretty impressive. The company has consistently gained 39% over the past five years and the capital employed within the company has increased by 69% over this period. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. You will see this when you look at well-run businesses or favorable business models.
The Key Takeaway
Ultimately, the company has proven that it can reinvest its capital at high rates of return, which you’ll recall is a trait of a multi-bagger. And given that the stock has only risen 7.9% over the past five years, we suspect the market is starting to recognize these trends. That’s why it might be worth taking a closer look at this stock to find out if it has more characteristics of a multi-bagger.
PageGroup does come with some risks though, and we’ve spotted 1 warning sign for PageGroup that might interest you.
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.