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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at AVADA Group (ASX:AVD) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 AVADA Group:

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

0.06 = AU$6.1m ÷ (AU$131m - AU$30m) (Based on the trailing twelve months to June 2024).

Therefore, AVADA Group has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 11%.

View our latest analysis for AVADA Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for AVADA Group's ROCE against it's prior returns. If you're interested in investigating AVADA Group's past further, check out this free graph covering AVADA Group's past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that AVADA Group is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 6.0% on its capital. And unsurprisingly, like most companies trying to break into the black, AVADA Group is utilizing 48% more capital than it was two years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line

In summary, it's great to see that AVADA Group has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 29% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing AVADA Group we've found 4 warning signs (2 are significant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.