To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at On Holding (NYSE:ONON) so let's look a bit deeper.
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. The formula for this calculation on On Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CHF154m ÷ (CHF1.7b - CHF373m) (Based on the trailing twelve months to September 2023).
So, On Holding has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
View our latest analysis for On Holding
In the above chart we have measured On Holding'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 On Holding here for free.
How Are Returns Trending?
On Holding has recently broken into profitability so their prior investments seem to be paying off. About three years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, On Holding is utilizing 452% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
Overall, On Holding gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 60% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While On Holding looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ONON is currently trading for a fair price.
While On Holding 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.