If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at British American Tobacco (LON:BATS) and its trend of ROCE, we really liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for British American Tobacco:

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

0.11 = UK£11b ÷ (UK£119b - UK£18b) (Based on the trailing twelve months to June 2024).

So, British American Tobacco has an ROCE of 11%. In isolation, that's a pretty standard return but against the Tobacco industry average of 18%, it's not as good.

View our latest analysis for British American Tobacco

Above you can see how the current ROCE for British American Tobacco compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for British American Tobacco .

What The Trend Of ROCE Can Tell Us

British American Tobacco has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 39%. The company is now earning UK£0.1 per dollar of capital employed. In regards to capital employed, British American Tobacco appears to been achieving more with less, since the business is using 21% less capital to run its operation. British American Tobacco may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In the end, British American Tobacco has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 26% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 2 warning signs for British American Tobacco that we think you should be aware of.

While British American Tobacco isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.