To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, BQE Water (CVE:BQE) looks quite promising in regards to its trends of return on capital.
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for BQE Water:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = CA$1.3m ÷ (CA$25m - CA$3.7m) (Based on the trailing twelve months to September 2024).
So, BQE Water has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 6.9%.
Check out our latest analysis for BQE Water
Above you can see how the current ROCE for BQE Water 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 analyst report for BQE Water .
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 191% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
All in all, it's terrific to see that BQE Water is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 586% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing BQE Water, we've discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.