To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So, when we ran our eye over Garmin's (NYSE:GRMN) trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Garmin:

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

0.20 = US$1.6b ÷ (US$9.6b - US$1.5b) (Based on the trailing twelve months to December 2024).

So, Garmin has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Durables industry average of 14%.

Check out our latest analysis for Garmin

Above you can see how the current ROCE for Garmin compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Garmin .

How Are Returns Trending?

Garmin deserves to be commended in regards to it's returns. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 58% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Garmin can keep this up, we'd be very optimistic about its future.

The Bottom Line On Garmin's ROCE

In short, we'd argue Garmin has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 215% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Garmin, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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