If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Teekay (NYSE:TK) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Teekay:

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

0.19 = US$411m ÷ (US$2.2b - US$116m) (Based on the trailing twelve months to June 2024).

Thus, Teekay has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 12% generated by the Oil and Gas industry.

See our latest analysis for Teekay

Historical performance is a great place to start when researching a stock so above you can see the gauge for Teekay's ROCE against it's prior returns. If you're interested in investigating Teekay's past further, check out this free graph covering Teekay's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Teekay has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 329% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 70% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Teekay's ROCE

In summary, it's great to see that Teekay has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 127% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for TK that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com