There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Franklin Covey's (NYSE:FC) look very promising so lets take a look.

What Is 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 Franklin Covey:

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

0.35 = US$30m ÷ (US$221m - US$137m) (Based on the trailing twelve months to May 2024).

So, Franklin Covey has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Franklin Covey

In the above chart we have measured Franklin Covey's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Franklin Covey .

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Franklin Covey. The figures show that over the last five years, returns on capital have grown by 1,178%. The company is now earning US$0.4 per dollar of capital employed. In regards to capital employed, Franklin Covey appears to been achieving more with less, since the business is using 20% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 62% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

From what we've seen above, Franklin Covey has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So with that in mind, we think the stock deserves further research.