To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Eneraqua Technologies' (LON:ETP) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Eneraqua Technologies:

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

0.23 = UK￡7.2m ÷ (UK￡50m - UK￡19m) (Based on the trailing twelve months to July 2023).

So, Eneraqua Technologies has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.

See our latest analysis for Eneraqua Technologies

In the above chart we have measured Eneraqua Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Eneraqua Technologies .

So How Is Eneraqua Technologies' ROCE Trending?

It's hard not to be impressed by Eneraqua Technologies' returns on capital. The company has employed 1,316% more capital in the last four years, and the returns on that capital have remained stable at 23%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Eneraqua Technologies can keep this up, we'd be very optimistic about its future.

On a side note, Eneraqua Technologies has done well to reduce current liabilities to 38% of total assets over the last four years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Despite these impressive fundamentals, the stock has collapsed 86% over the last year, so there is likely other factors affecting the company's future prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.