There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think CommScope Holding Company (NASDAQ:COMM) 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)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for CommScope Holding Company:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$388m ÷ (US$8.7b - US$1.0b) (Based on the trailing twelve months to March 2024).
Thus, CommScope Holding Company has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Communications industry average of 8.4%.
Above you can see how the current ROCE for CommScope Holding Company compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CommScope Holding Company for free.
The Trend Of ROCE
There hasn't been much to report for CommScope Holding Company's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at CommScope Holding Company in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
In summary, CommScope Holding Company isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Moreover, since the stock has crumbled 91% over the last five years, it appears investors are expecting the worst. 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.
If you'd like to know more about CommScope Holding Company, we've spotted 3 warning signs, and 1 of them is concerning.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.