What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Jumbo Interactive's (ASX:JIN) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Jumbo Interactive:

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

0.38 = AU$47m ÷ (AU$168m - AU$44m) (Based on the trailing twelve months to December 2022).

So, Jumbo Interactive has an ROCE of 38%.  In absolute terms that's a great return and it's even better than the Hospitality industry average of 8.1%.

View our latest analysis for Jumbo Interactive  roce

In the above chart we have measured Jumbo Interactive's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

What Does the ROCE Trend For Jumbo Interactive Tell Us?

It's hard not to be impressed by Jumbo Interactive's returns on capital. The company has employed 211% more capital in the last five years, and the returns on that capital have remained stable at 38%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Jumbo Interactive can keep this up, we'd be very optimistic about its future.

In Conclusion...

In short, we'd argue Jumbo Interactive has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 276% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified  1 warning sign  with Jumbo Interactive and understanding it should be part of your investment process.

If you'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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