To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Garmin's (NYSE:GRMN) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Garmin is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = US$1.1b ÷ (US$7.8b - US$1.6b) (Based on the trailing twelve months to June 2022).

Thus, Garmin has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 17% generated by the Consumer Durables industry.

See our latest analysis for Garmin

In the above chart we have measured Garmin's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Garmin here for free.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 62% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Garmin has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Garmin's ROCE

The main thing to remember is that Garmin has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 82% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 2 warning signs with Garmin and understanding these should be part of your investment process.

While Garmin may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.