If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Schaffer (ASX:SFC) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Schaffer:

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

0.17 = AU$36m ÷ (AU$276m - AU$62m) (Based on the trailing twelve months to December 2021).

Therefore, Schaffer has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Auto Components industry.

See our latest analysis for Schaffer  roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Schaffer's past further, check out this freegraph of past earnings, revenue and cash flow.

So How Is Schaffer's ROCE Trending?

The trends we've noticed at Schaffer are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 52%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

All in all, it's terrific to see that Schaffer is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.



Schaffer does have some risks though, and we've spotted  2 warning signs for Schaffer that you might be interested in.

For those who like to invest in solid companies, check out this freelist 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.