If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Bodycote (LON:BOY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Bodycote, this is the formula:

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

0.13 = UK￡115m ÷ (UK￡1.1b - UK￡225m) (Based on the trailing twelve months to December 2023).

Therefore, Bodycote has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

View our latest analysis for Bodycote

Above you can see how the current ROCE for Bodycote compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Bodycote .

What Does the ROCE Trend For Bodycote Tell Us?

Things have been pretty stable at Bodycote, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Bodycote to be a multi-bagger going forward. This probably explains why Bodycote is paying out 42% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line

In summary, Bodycote isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 1.7% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.