There are a few key trends to look for if we want to identify the next multi-bagger. 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 Forrester Research (NASDAQ:FORR), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Forrester Research:

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

0.063 = US$20m ÷ (US$536m - US$216m) (Based on the trailing twelve months to December 2023).

Thus, Forrester Research has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

Check out our latest analysis for Forrester Research

In the above chart we have measured Forrester Research's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Forrester Research here for free.

So How Is Forrester Research's ROCE Trending?

When we looked at the ROCE trend at Forrester Research, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Forrester Research has done well to pay down its current liabilities to 40% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Forrester Research have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 56% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.