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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That's why when we briefly looked at Altria Group's (NYSE:MO) ROCE trend, we were very happy with what we saw.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Altria Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$12b ÷ (US$44b - US$5.8b) (Based on the trailing twelve months to June 2021).
Therefore, Altria Group has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Tobacco industry average of 18%.
Above you can see how the current ROCE for Altria Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Altria Group.
What The Trend Of ROCE Can Tell Us
We'd be pretty happy with returns on capital like Altria Group. Over the past five years, ROCE has remained relatively flat at around 31% and the business has deployed 50% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
In summary, we're delighted to see that Altria Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. In light of this, the stock has only gained 3.1% over the last five years for shareholders who have owned the stock in this period. So to determine if Altria Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
One more thing to note, we've identified 3 warning signs with Altria Group and understanding them should be part of your investment process.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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.
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