Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating Breedon Group (LON:BREE), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Breedon Group is:

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

0.097 = UK£145m ÷ (UK£1.8b - UK£285m) (Based on the trailing twelve months to December 2022).

Thus, Breedon Group has an ROCE of 9.7%.  In absolute terms, that's a low return but it's around the Basic Materials industry average of 11%.

See our latest analysis for Breedon Group  roce

In the above chart we have measured Breedon Group'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 freereport for Breedon Group.

So How Is Breedon Group's ROCE Trending?

There are better returns on capital out there than what we're seeing at Breedon Group. Over the past five years, ROCE has remained relatively flat at around 9.7% and the business has deployed 111% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Breedon Group's ROCE

In conclusion, Breedon Group has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Breedon Group does have some risks though, and we've spotted  1 warning sign for Breedon Group that you might be interested in.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

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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