If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Speaking of which, we have noticed some big changes in GoPro (NASDAQ: GPRO) returns on capital, so let’s take a look.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for GoPro, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.15 = $ 107 million ÷ ($ 1.1 billion – $ 396 million) (Based on the last twelve months up to September 2021).
Therefore, GoPro has a ROCE of 15%. This is a fairly standard return and it is in line with the industry average of 15%.
See our latest review for GoPro
In the graph above, we measured GoPro’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for GoPro.
So what’s the GoPro ROCE trend?
The fact that GoPro is now generating pre-tax profits on its past investments is very encouraging. About five years ago, the company was making losses, but things have turned around as it now earns 15% on its capital. On top of that, GoPro employs 32% more capital than before, which is expected of a company trying to achieve profitability. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
The bottom line
In short, we’re delighted to see that GoPro’s reinvestment activities have paid off and the company is now profitable. Given that the stock has delivered 18% to its shareholders over the past five years, it may be fair to think that investors are not yet fully aware of the promising trends. With that in mind, we would dig deeper into this stock in case there were more traits that could cause it to multiply in the long term.
One more thing: we have identified 4 warning signs with GoPro (at least 2 of which are significant), and understanding them would certainly be helpful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.