To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Park-Ohio Holdings (NASDAQ:PKOH) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Park-Ohio Holdings is:

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

0.087 = US$87m ÷ (US$1.5b - US$451m) (Based on the trailing twelve months to September 2023).

Thus, Park-Ohio Holdings has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

See our latest analysis for Park-Ohio Holdings

Above you can see how the current ROCE for Park-Ohio Holdings 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 report for Park-Ohio Holdings.

How Are Returns Trending?

Over the past five years, Park-Ohio Holdings' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Park-Ohio Holdings doesn't end up being a multi-bagger in a few years time.

In Conclusion...

In summary, Park-Ohio Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 11% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Park-Ohio Holdings does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those is potentially serious...

While Park-Ohio 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.