Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 investigating Natural Grocers by Vitamin Cottage (NYSE:NGVC), we don't think it's current trends fit the mold of a multi-bagger.

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 Natural Grocers by Vitamin Cottage:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.087 = US$44m ÷ (US$654m - US$152m) (Based on the trailing twelve months to June 2024).

So, Natural Grocers by Vitamin Cottage has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natural Grocers by Vitamin Cottage's ROCE against it's prior returns. If you're interested in investigating Natural Grocers by Vitamin Cottage's past further, check out this free graph covering Natural Grocers by Vitamin Cottage's past earnings, revenue and cash flow.

So How Is Natural Grocers by Vitamin Cottage's ROCE Trending?

There are better returns on capital out there than what we're seeing at Natural Grocers by Vitamin Cottage. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 110% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Natural Grocers by Vitamin Cottage's ROCE

In summary, Natural Grocers by Vitamin Cottage has simply been reinvesting capital and generating the same low rate of return as before. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 268% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

While Natural Grocers by Vitamin Cottage doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for NGVC on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.