If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at TriMas (NASDAQ:TRS) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on TriMas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = US$78m ÷ (US$1.3b - US$159m) (Based on the trailing twelve months to December 2023).
Therefore, TriMas has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 11%.
In the above chart we have measured TriMas' 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 TriMas for free.
What Does the ROCE Trend For TriMas Tell Us?
On the surface, the trend of ROCE at TriMas doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 10% five years ago. However it looks like TriMas 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.
The Bottom Line
Bringing it all together, while we're somewhat encouraged by TriMas' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 14% 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 TriMas has the makings of a multi-bagger.
On a separate note, we've found 2 warning signs for TriMas you'll probably want to know about.
While TriMas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.