To find a multi-bagger stock, what underlying trends should we look for in a company? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we ran our eyes Italtile’s (JSE:ITE) ROCE trend, we really liked 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 Italtile, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.34 = R2.6b ÷ (R8.4b – R727m) (Based on the last twelve months to December 2021).
Thereby, Italtile has a ROCE of 34%. This is a fantastic return and not only that, it exceeds the 16% average earned by companies in a similar industry.
See our latest analysis for Italtile
Historical performance is a great starting point when researching a stock. So you can see Italtile’s ROCE gauge above against past returns. If you want to dive into Italtile’s earnings, revenue, and cash flow history, check out these free graphics here.
The ROCE trend
We’d rather be happy with capital returns like Italtile. Over the past five years, ROCE has remained relatively stable at around 34% and the company has deployed 110% additional capital into its operations. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. You will see this when you look at well-run businesses or favorable business models.
In short, we would say Italtile has the makings of a multi-bagger as it has been able to compound its capital at very profitable rates of return. And since the stock has risen sharply over the past five years, it looks like the market might be expecting that trend to continue. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
One more thing we spotted 1 warning sign against Italtile that might interest you.
Italtile is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.
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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.