To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Kelly Partners Group Holdings (ASX:KPG) looks attractive right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Kelly Partners Group Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = AU$12m ÷ (AU$58m - AU$15m) (Based on the trailing twelve months to June 2020).
Thus, Kelly Partners Group Holdings has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
View our latest analysis for Kelly Partners Group Holdings
In the above chart we have measured Kelly Partners Group Holdings' 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 Kelly Partners Group Holdings here for free.
What Can We Tell From Kelly Partners Group Holdings' ROCE Trend?
We'd be pretty happy with returns on capital like Kelly Partners Group Holdings. Over the past five years, ROCE has remained relatively flat at around 29% and the business has deployed 141% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
The Key Takeaway
In summary, we're delighted to see that Kelly Partners Group Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. In light of this, the stock has only gained 12% over the last three years for shareholders who have owned the stock in this period. So to determine if Kelly Partners Group Holdings is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
If you want to continue researching Kelly Partners Group Holdings, you might be interested to know about the 5 warning signs that our analysis has discovered.
Kelly Partners Group Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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