To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 briefly looking over the numbers, we don't think Cordlife Group (SGX:P8A) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Cordlife Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0061 = S$1.3m ÷ (S$228m - S$21m) (Based on the trailing twelve months to December 2022).
Therefore, Cordlife Group has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 11%.
View our latest analysis for Cordlife Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cordlife Group's ROCE against it's prior returns. If you're interested in investigating Cordlife Group's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Cordlife Group's ROCE Trending?
On the surface, the trend of ROCE at Cordlife Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.6% from 0.8% five years ago. However it looks like Cordlife Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Cordlife Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 60% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Cordlife Group has the makings of a multi-bagger.