If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at RGC Resources (NASDAQ:RGCO), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on RGC Resources is:

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

0.058 = US$17m ÷ (US$314m - US$24m) (Based on the trailing twelve months to June 2024).

Thus, RGC Resources has an ROCE of 5.8%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

See our latest analysis for RGC Resources

In the above chart we have measured RGC Resources' 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 analyst report for RGC Resources .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at RGC Resources. The company has consistently earned 5.8% for the last five years, and the capital employed within the business has risen 31% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On RGC Resources' ROCE

As we've seen above, RGC Resources' returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think RGC Resources has the makings of a multi-bagger.

If you want to know some of the risks facing RGC Resources we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While RGC Resources isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.