If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Allegro.eu's (WSE:ALE) returns on capital, so let's have a look.
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. To calculate this metric for Allegro.eu, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = zł1.2b ÷ (zł19b - zł2.3b) (Based on the trailing twelve months to March 2023).
Thus, Allegro.eu has an ROCE of 6.9%. On its own, that's a low figure but it's around the 7.7% average generated by the Multiline Retail industry.
In the above chart we have measured Allegro.eu's 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 report for Allegro.eu.
Allegro.eu has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 68% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
To bring it all together, Allegro.eu has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 23% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
While Allegro.eu looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ALE is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.