To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Rex Trueform Group (JSE:RTN) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Rex Trueform Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.043 = SAR31m ÷ (SAR839m – SAR126m) (Based on the trailing twelve months to December 2019).
Thus, Rex Trueform Group has an ROCE of 4.3%. Ultimately, that’s a low return and it under-performs the Specialty Retail industry average of 16%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Rex Trueform Group’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rex Trueform Group, check out these free graphs here.
The Trend Of ROCE
The fact that Rex Trueform Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.3% on its capital. In addition to that, Rex Trueform Group is employing 165% more capital than previously which is expected of a company that’s trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
To the delight of most shareholders, Rex Trueform Group has now broken into profitability. And a remarkable 231% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One more thing to note, we’ve identified 2 warning signs with Rex Trueform Group and understanding them should be part of your investment process.
While Rex Trueform Group isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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