If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Adrad Holdings (ASX:AHL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 1 warning sign about Adrad Holdings. View them for free.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Adrad Holdings:

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

0.057 = AU$9.6m ÷ (AU$190m - AU$23m) (Based on the trailing twelve months to December 2024).

So, Adrad Holdings has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

View our latest analysis for Adrad Holdings

Above you can see how the current ROCE for Adrad Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Adrad Holdings for free.

So How Is Adrad Holdings' ROCE Trending?

On the surface, the trend of ROCE at Adrad Holdings doesn't inspire confidence. Over the last three years, returns on capital have decreased to 5.7% from 16% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a side note, Adrad Holdings has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Adrad Holdings' ROCE

To conclude, we've found that Adrad Holdings is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Adrad Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Adrad Holdings 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.