There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in U.S. Silica Holdings' (NYSE:SLCA) returns on capital, so let's have a look.

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 U.S. Silica Holdings is:

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

0.14 = US$277m ÷ (US$2.1b - US$186m) (Based on the trailing twelve months to December 2023).

So, U.S. Silica Holdings has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Energy Services industry.

Check out our latest analysis for U.S. Silica Holdings

In the above chart we have measured U.S. Silica Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for U.S. Silica Holdings .

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at U.S. Silica Holdings. The figures show that over the last five years, returns on capital have grown by 156%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

From what we've seen above, U.S. Silica Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 19% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with U.S. Silica Holdings (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

While U.S. Silica Holdings 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.