What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating United Company RUSAL International (HKG:486), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on United Company RUSAL International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0042 = US$78m ÷ (US$21b - US$2.9b) (Based on the trailing twelve months to June 2023).
Therefore, United Company RUSAL International has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.4%.
See our latest analysis for United Company RUSAL International
Historical performance is a great place to start when researching a stock so above you can see the gauge for United Company RUSAL International's ROCE against it's prior returns. If you'd like to look at how United Company RUSAL International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at United Company RUSAL International, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like United Company RUSAL International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From United Company RUSAL International's ROCE
Bringing it all together, while we're somewhat encouraged by United Company RUSAL International's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 3 warning signs with United Company RUSAL International (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While United Company RUSAL International 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.