There are a few key trends to look out for if we want to identify the next multi-bagger. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth quantity capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. However, after briefly looking at the numbers, we don’t think Investment AB Latour (STO: LATO B) has the makings of a multi-bagger in the future, but let’s see why it may be.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Investment AB Latour is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061 = kr2.4b ÷ (kr46b – kr5.5b) (Based on the last twelve months to September 2021).
Therefore, Investment AB Latour has a ROCE of 6.1%. In absolute terms, this is a weak return and it is also below the industry average of 7.6%.
See our latest analysis for Investment AB Latour
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Investment AB Latour’s past, check out this free chart of past profits, revenue and cash flow.
What does the ROCE trend tell us for AB Latour investment?
Regarding the historical ROCE trend of Investment AB Latour, it does not really require attention. The company has employed 104% more capital over the past five years, and the return on that capital has remained stable at 6.1%. Since the company has increased the amount of capital employed, it appears that the investments that have been made simply do not provide a high return on capital.
The essentials on the ROCE of Investment AB Latour
As we have seen above, the return on capital of Investment AB Latour has not increased but it is reinvesting in the company. Yet for long-term shareholders, the stock has offered them an incredible 234% return over the past five years, so the market appears to be optimistic about its future. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is a multi-bagger going forward.
If you want to know the risks incurred by Investment AB Latour, we have discovered 1 warning sign which you should be aware of.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.