If you are looking for a multi-bagger, there are a few things to look out for. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Therefore, when we briefly examined Cintas’ (NASDAQ: CTAS) Trend ROCE, we were very happy with what we saw.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Cintas:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.26 = $ 1.4 billion ÷ ($ 7.9 billion – $ 2.3 billion) (Based on the last twelve months up to August 2021).
Therefore, Cintas has a ROCE of 26%. This is a fantastic return and not only that, it exceeds the 8.8% average earned by companies in a similar industry.
NasdaqGS: CTAS Return on Capital Employed November 30, 2021
Above you can see how Cintas’ current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
Cintas deserves to be congratulated for its feedback. The company has steadily gained 26% over the past five years, and the capital employed within the company has increased by 62% during this period. Now that the ROCE is attractive at 26%, this combination is actually quite attractive because it means that the company can constantly put money in to work and generate those high returns. If Cintas can keep up this pace, we would be very optimistic about its future.
On another note, while the trend change in ROCE may not attract attention, it’s worth noting that current liabilities have actually increased over the past five years. This is intriguing because if current liabilities had not increased to 29% of total assets, this reported ROCE would likely be less than 26% because total capital employed would be higher. The ROCE of 26% could be even lower if current liabilities were not 29% of total assets, as the formula would show a broader base of total capital employed. With that in mind, just beware if this ratio increases in the future, because if it becomes particularly high, there are new elements of risk.
Our opinion on Cintas ROCE
In short, we would say that Cintas has the makings of a multi-bagger since it has been able to compose its capital at very profitable rates of return. On top of that, the stock rewarded shareholders with a remarkable 288% return for those who have held it in the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
If you want to know the risks that Cintas faces, we have discovered 1 warning sign that you need to be aware of.
If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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