What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Ariadne Australia (ASX:ARA), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Ariadne Australia, this is the formula:

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

0.0066 = AU$1.4m ÷ (AU$222m - AU$15m) (Based on the trailing twelve months to December 2023).

So, Ariadne Australia has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.

View our latest analysis for Ariadne Australia

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

What Can We Tell From Ariadne Australia's ROCE Trend?

On the surface, the trend of ROCE at Ariadne Australia doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 0.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Ariadne Australia's ROCE

We're a bit apprehensive about Ariadne Australia because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.