To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Points International (TSE:PTS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Points International, this is the formula:

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

0.074 = US$5.4m ÷ (US$143m - US$70m) (Based on the trailing twelve months to June 2020).

Thus, Points International has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 9.4%.

View our latest analysis for Points International

Above you can see how the current ROCE for Points International 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 Points International here for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 69%. That being said, Points International raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Points International might not have received a full period of earnings contribution from it.

On a separate but related note, it's important to know that Points International has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Points International's ROCE

In summary, we're somewhat concerned by Points International's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 11% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.