There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we’ve noticed some promising trends at Brisbane Broncos (ASX:BBL) so let’s look a bit deeper.
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. To calculate this metric for Brisbane Broncos, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = AU$7.0m ÷ (AU$63m – AU$13m) (Based on the trailing twelve months to December 2024).
Thus, Brisbane Broncos has an ROCE of 14%. In absolute terms, that’s a satisfactory return, but compared to the Entertainment industry average of 8.8% it’s much better.
See our latest analysis for Brisbane Broncos.
What The Trend Of ROCE Can Tell Us
We like the trends that we’re seeing from Brisbane Broncos. Over the last five years, returns on capital employed have risen substantially to 14%. The amount of capital employed has increased too, by 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
Our Take On Brisbane Broncos’ ROCE
In summary, it’s great to see that Brisbane Broncos can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 172% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we’ve identified 1 warning sign with Brisbane Broncos and understanding this should be part of your investment process.
While Brisbane Broncos isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.