There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Avista (NYSE:AVA), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Avista, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$222m ÷ (US$7.5b - US$583m) (Based on the trailing twelve months to September 2023).
Thus, Avista has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.1%.
See our latest analysis for Avista
In the above chart we have measured Avista'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 Avista here for free.
So How Is Avista's ROCE Trending?
We weren't thrilled with the trend because Avista's ROCE has reduced by 39% over the last five years, while the business employed 32% more capital. Usually this isn't ideal, but given Avista conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Avista probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
What We Can Learn From Avista's ROCE
To conclude, we've found that Avista is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing: We've identified 4 warning signs with Avista (at least 1 which is potentially serious) , and understanding these would certainly be useful.
While Avista 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.