Thezzcast: good vibes onlyre are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing

return

on capital employed (ROCE) and then alongside that, an ever-increasing

base

of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating

Treatt

(

LON:TET

), 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. To calculate this metric for Treatt, this is the formula:

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

0.13 = UK£13m ÷ (UK£139m - UK£37m)

(Based on the trailing twelve months to March 2020)

.

Thus,

Treatt has an ROCE of 13%.

In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.4% it's much better.

Check out our latest analysis for Treatt

roce

Above you can see how the current ROCE for Treatt compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our

free

report on analyst forecasts for the company

.

What Does the ROCE Trend For Treatt Tell Us?

On the surface, the trend of ROCE at Treatt doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Treatt's ROCE

To conclude, we've found that Treatt is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 336% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Treatt could be trading at an attractive price in other respects, so you might find our

free intrinsic value estimation

on our platform quite valuable.

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.

This article by Simply Wall St is general in nature. 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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