To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Brickworks (ASX:BKW), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 Brickworks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = AU$34m ÷ (AU$3.3b - AU$192m) (Based on the trailing twelve months to January 2020).
So, Brickworks has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.2%.
In the above chart we have a measured Brickworks' 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 Brickworks here for free.
What Can We Tell From Brickworks' ROCE Trend?
When we looked at the ROCE trend at Brickworks, we didn't gain much confidence. Around five years ago the returns on capital were 1.9%, but since then they've fallen to 1.1%. However it looks like Brickworks might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by Brickworks' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 32% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you'd like to know about the risks facing Brickworks, we've discovered 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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.
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