To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating BetterLife Holding (HKG:6909), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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 BetterLife Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CN¥135m ÷ (CN¥4.8b - CN¥1.3b) (Based on the trailing twelve months to June 2024).
So, BetterLife Holding has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.6%.
See our latest analysis for BetterLife Holding
Historical performance is a great place to start when researching a stock so above you can see the gauge for BetterLife Holding's ROCE against it's prior returns. If you'd like to look at how BetterLife Holding has performed in the past in other metrics, you can view this free graph of BetterLife Holding's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at BetterLife Holding, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a side note, BetterLife Holding has done well to pay down its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
We're a bit apprehensive about BetterLife Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 79% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with BetterLife Holding (including 2 which are concerning) .
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.
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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.