If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Core & Main's (NYSE:CNM) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Core & Main, this is the formula:

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

0.17 = US$745m ÷ (US$5.1b - US$774m) (Based on the trailing twelve months to January 2024).

Thus, Core & Main has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Trade Distributors industry.

Above you can see how the current ROCE for Core & Main compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Core & Main for free.

How Are Returns Trending?

Investors would be pleased with what's happening at Core & Main. The data shows that returns on capital have increased substantially over the last three years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 26% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Core & Main has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 164% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Core & Main can keep these trends up, it could have a bright future ahead.

Like most companies, Core & Main does come with some risks, and we've found 1 warning sign that you should be aware of.

While Core & Main 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.