There are some key trends we need to look out for when identifying the next multibagger. First, we want to see a growing return on the capital employed (ROCE) and then alongside it an ever increasing base of the capital employed. This shows us that it is a compound interest machine that is able to continuously reinvest its profits into the company and generate higher returns. So when we looked at Savaria (TSE:SIS) and its ROCE trend, we really liked what we saw.
Return on Capital Employed (ROCE): What is it?
If you’ve never worked with ROCE, it measures the “return” (earnings before taxes) a company generates on the capital employed in its business. Analysts use this formula to calculate it for Savaria:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.10 = CA$94 million ÷ (CA$1.1 billion – CA$173 million) (Based on the last twelve months to June 2024).
Therefore, Savaria has a ROCE of 10%. In absolute terms, this is a fairly normal return, but it falls short of the industry average for mechanical engineering.
Check out our latest analysis for Savaria
Above you can see how the current ROCE for Savaria compares to its past returns on capital, but there is only so much to be inferred from the past. If you are interested, you can see analyst forecasts in our free Analyst report for Savaria.
So how is Savaria’s ROCE developing?
Savaria is showing some positive trends. Over the last five years, the return on capital has increased significantly to 10%. Essentially, the company is earning more per dollar of capital invested and in addition, it is now employing 134% more capital. Increasing returns on a growing amount of capital is common among multi-baggers and that is why we are impressed.
Finally…
All in all, it’s great to see Savaria reaping the rewards of past investments and growing its capital base. And a remarkable 100% total return over the past five years tells us that investors expect even more good things to come in the future. With that in mind, we think this stock is worth taking a closer look at, because if Savaria can maintain these trends, the company could have a bright future ahead of it.
If you want to know more about the risks of Savaria, we have found out 2 warning signs that you should know.
If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.
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