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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Arcadis (AMS:ARCAD) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Arcadis:

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

0.15 = €356m ÷ (€3.9b - €1.5b) (Based on the trailing twelve months to June 2024).

Therefore, Arcadis has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

See our latest analysis for Arcadis

Above you can see how the current ROCE for Arcadis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Arcadis for free.

What Does the ROCE Trend For Arcadis Tell Us?

We like the trends that we're seeing from Arcadis. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% 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.

The Bottom Line On Arcadis' ROCE

To sum it up, Arcadis has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 288% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Arcadis and understanding this should be part of your investment process.

While Arcadis may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.