To find multi-bagger stock, what are the underlying trends we need to look for in a business? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Although, when we considered Southwest Gas Holdings (NYSE: SWX), it doesn’t appear to have ticked all of those boxes.
What is Return on Employee Capital (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. Analysts use this formula to calculate it for Southwest Gas Holdings:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.054 = US $ 419 million ÷ (US $ 9.0 billion – US $ 1.3 billion) (Based on the last twelve months up to June 2021).
Therefore, Southwest Gas Holdings has a ROCE of 5.4%. Even though it is in line with the industry average of 5.4%, it is still a poor performance in and of itself.
NYSE: SWX Return on Capital Employed August 21, 2021
In the chart above, we’ve measured Southwest Gas Holdings’ past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free business analyst forecast report.
What the ROCE trend can tell us
There are better returns on capital than what we see at Southwest Gas Holdings. The company has steadily gained 5.4% over the past five years and the capital employed within the company has increased by 62% during this period. This low ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the company is not deploying the funds in high return investments.
Southwest Gas Holdings’ ROCE balance sheet
In short, Southwest Gas Holdings simply reinvested capital and generated the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders in the past five years. So if you’re looking for a multi-bagger, the underlying trends indicate you might have a better chance elsewhere.
If you’re interested in learning more about Southwest Gas Holdings, we’ve spotted 2 warning signs, and 1 of them cannot be ignored.
While Southwest Gas Holdings does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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