To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Matthews International (NASDAQ:MATW), 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 Matthews International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$75m ÷ (US$2.0b - US$339m) (Based on the trailing twelve months to March 2022).
Therefore, Matthews International has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.5%.
In the above chart we have measured Matthews International's 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 Matthews International here for free.
So How Is Matthews International's ROCE Trending?
Things have been pretty stable at Matthews International, with its capital employed and returns on that capital staying somewhat the same for the last 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 Matthews International in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Our Take On Matthews International's ROCE
In a nutshell, Matthews International has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 45% 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 Matthews International has the makings of a multi-bagger.
If you want to know some of the risks facing Matthews International we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.
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.