To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Spire (NYSE:SR) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for Spire, this is the formula:

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

0.055 = US$509m ÷ (US$11b - US$2.0b) (Based on the trailing twelve months to December 2024).

So, Spire has an ROCE of 5.5%. On its own, that's a low figure but it's around the 6.1% average generated by the Gas Utilities industry.

See our latest analysis for Spire

In the above chart we have measured Spire's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Spire for free.

What Does the ROCE Trend For Spire Tell Us?

There are better returns on capital out there than what we're seeing at Spire. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 5.5%. 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.

Our Take On Spire's ROCE

Long story short, while Spire has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 27% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Spire (of which 1 is potentially serious!) that you should know about.

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.

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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.