To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Pfeiffer Vacuum Technology (ETR:PFV), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Pfeiffer Vacuum Technology:

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

0.12 = €92m ÷ (€985m - €217m) (Based on the trailing twelve months to June 2024).

Thus, Pfeiffer Vacuum Technology has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.8% it's much better.

Check out our latest analysis for Pfeiffer Vacuum Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pfeiffer Vacuum Technology's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pfeiffer Vacuum Technology.

What Does the ROCE Trend For Pfeiffer Vacuum Technology Tell Us?

When we looked at the ROCE trend at Pfeiffer Vacuum Technology, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 12%. However it looks like Pfeiffer Vacuum Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Pfeiffer Vacuum Technology's ROCE

Bringing it all together, while we're somewhat encouraged by Pfeiffer Vacuum Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 29% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Pfeiffer Vacuum Technology does have some risks though, and we've spotted 1 warning sign for Pfeiffer Vacuum Technology that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.