If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at O-I Glass (NYSE:OI) and its ROCE trend, we weren’t exactly thrilled.
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 O-I Glass:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.066 = US$464m ÷ (US$8.9b – US$1.9b) (Based on the trailing twelve months to December 2020).
Thus, O-I Glass has an ROCE of 6.6%. In absolute terms, that’s a low return and it also under-performs the Packaging industry average of 10%.
Check out our latest analysis for O-I Glass
In the above chart we have measured O-I Glass’ prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Over the past five years, O-I Glass’ ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn’t expect O-I Glass to be a multi-bagger going forward.
What We Can Learn From O-I Glass’ ROCE
In summary, O-I Glass isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 15% so the market doesn’t look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don’t think O-I Glass has the makings of a multi-bagger.
On a final note, we found 2 warning signs for O-I Glass (1 is significant) you should be aware of.
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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