To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Canterbury Park Holding (NASDAQ:CPHC), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Canterbury Park Holding:

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

0.056 = US$5.6m ÷ (US$114m - US$15m) (Based on the trailing twelve months to September 2024).

Thus, Canterbury Park Holding has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.4%.

See our latest analysis for Canterbury Park Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Canterbury Park Holding's ROCE against it's prior returns. If you'd like to look at how Canterbury Park Holding has performed in the past in other metrics, you can view this free graph of Canterbury Park Holding's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Canterbury Park Holding. Over the past five years, ROCE has remained relatively flat at around 5.6% and the business has deployed 85% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Canterbury Park Holding's ROCE

Long story short, while Canterbury Park Holding has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 73% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with Canterbury Park Holding and understanding them should be part of your investment process.

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.