There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Australian Agricultural Projects (ASX:AAP) 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. To calculate this metric for Australian Agricultural Projects, this is the formula:

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

0.007 = AU$111k ÷ (AU$21m - AU$4.7m) (Based on the trailing twelve months to December 2023).

Thus, Australian Agricultural Projects has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

Check out our latest analysis for Australian Agricultural Projects

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Australian Agricultural Projects is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 0.7% on its capital. Not only that, but the company is utilizing 81% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

In summary, it's great to see that Australian Agricultural Projects has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.