To find a multi-bagger stock, what underlying trends should we look for in a company? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we briefly examined by Avery Dennison (NYSE:AVY) ROCE trend, we were very pleased with what we saw.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for Avery Dennison, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = $1.1 billion ÷ ($8.0 billion – $2.6 billion) (Based on the last twelve months to October 2021).
So, Avery Dennison has a ROCE of 20%. This is a fantastic return and not only that, it exceeds the 10% average earned by companies in a similar industry.
See our latest analysis for Avery Dennison
Above, you can see how Avery Dennison’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you want to see what analysts are predicting for the future, you should check out our free report for Avery Dennison.
So, what is Avery Dennison’s ROCE trend?
We’d rather be happy with returns on capital like Avery Dennison. Over the past five years, ROCE has remained relatively stable at around 20% and the company has deployed 111% additional capital into its operations. Now considering that the ROCE is an attractive 20%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
By the way, Avery Dennison has been quite successful in reducing current liabilities to 33% of total assets over the past five years. Indeed, suppliers are now financing the company less, which can reduce certain elements of risk.
Our take on Avery Dennison’s ROCE
In short, we would say that Avery Dennison has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable return of 217% for those who have held over the past five years. So while the stock may be more “expensive” than it was before, we believe the strong fundamentals warrant this stock for further research.
On a separate note, we found 2 warning signs for Avery Dennison you will probably want to know more.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.