To find multi-bagger stock, what are the underlying trends we need to look for in a business? Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly reviewing the numbers, we don’t think Apollo pipes (NSE: APOLLOPIPE) has the makings of a multi-bagger in the future, but let’s see why this may be the case.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Apollo Pipes:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.15 = ₹ 566m ÷ (₹ 4.9b – ₹ 1.2b) (Based on the last twelve months up to March 2021).
Therefore, Apollo Pipes has a ROCE of 15%. In absolute terms, that’s a pretty normal return, and it’s pretty close to the construction industry average of 13%.
Check out our latest analysis for Apollo Pipes
Historical performance is a great place to start when researching a stock. So above you can see the gauge of Apollo Pipes’ ROCE compared to its past yields. If you want to take a look at how Apollo Pipes performed in the past in other metrics, you can check out this free graph of past income, income and cash flow.
So what’s the Apollo Pipes ROCE trend?
When we looked at the ROCE trend at Apollo Pipes, we didn’t gain much confidence. Over the past five years, return on capital has declined to 15%, down from 28% five years ago. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. If these investments prove to be successful, it can bode very well for long-term stock performance.
The bottom line
As returns have plummeted for Apollo Pipes lately, we are encouraged to see sales increasing and the company reinvesting in its operations. And long-term investors should be optimistic about the future, as the stock has returned a whopping 200% to shareholders over the past year. So if these growth trends continue, we would be optimistic about the future of the title.
On a final note, we found 2 warning signs for Apollo Pipes (1 is potentially serious) you should be aware of.
While Apollo Pipes doesn’t get the highest yield, check out this free list of companies that generate high returns on equity with strong balance sheets.
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