There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think Renewable Energy Group (NASDAQ:REGI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Renewable Energy Group:

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

0.098 = US$220m ÷ (US$2.4b - US$201m) (Based on the trailing twelve months to September 2021).

So, Renewable Energy Group has an ROCE of 9.8%. On its own, that's a low figure but it's around the 9.4% average generated by the Oil and Gas industry.

See our latest analysis for Renewable Energy Group

Above you can see how the current ROCE for Renewable Energy Group 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 Renewable Energy Group.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Renewable Energy Group. The company has employed 153% more capital in the last five years, and the returns on that capital have remained stable at 9.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Renewable Energy Group's ROCE

In summary, Renewable Energy Group has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 326% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 6 warning signs with Renewable Energy Group (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.