If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we ran our eyes Goals (ASX:OCL) ROCE trend, we really 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. To calculate this metric for Objective, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.42 = AU$24 million ÷ (AU$110 million – AU$52 million) (Based on the last twelve months to December 2021).
So, Goal has a ROCE of 42%. In absolute terms, this is an excellent performance and even better than the software industry average of 11%.
See our latest analysis for Objective
Above you can see how the current ROCE for Objective compares to its past returns on capital, but there is little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
So, what is the ROCE trend for Objective?
We’d rather be happy with a return on capital like Objective. The company has consistently gained 42% over the past five years and the capital employed within the company has increased by 162% over this period. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Furthermore, Objective’s current liabilities are still quite high at 48% of total assets. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
In summary, we are pleased to see that Objective has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And long-term investors would be delighted with the 577% return they’ve received over the past five years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
There are some risks involved with the goal, however, and we have spotted 1 Lens warning sign 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.