If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating RediShred Capital (CVE:KUT), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on RediShred Capital is:

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

0.053 = CA$3.4m ÷ (CA$95m - CA$30m) (Based on the trailing twelve months to March 2024).

So, RediShred Capital has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.8%.

See our latest analysis for RediShred Capital

In the above chart we have measured RediShred Capital's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for RediShred Capital .

What Does the ROCE Trend For RediShred Capital Tell Us?

When we looked at the ROCE trend at RediShred Capital, we didn't gain much confidence. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 5.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 31%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

To conclude, we've found that RediShred Capital is reinvesting in the business, but returns have been falling. Since the stock has declined 35% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.