If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Sirius XM Holdings (NASDAQ:SIRI), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sirius XM Holdings is:

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

0.24 = US$2.1b ÷ (US$11b - US$2.6b) (Based on the trailing twelve months to June 2024).

Thus, Sirius XM Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Media industry average of 10%.

See our latest analysis for Sirius XM Holdings

Above you can see how the current ROCE for Sirius XM Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sirius XM Holdings .

What Can We Tell From Sirius XM Holdings' ROCE Trend?

There hasn't been much to report for Sirius XM Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward. This probably explains why Sirius XM Holdings is paying out 38% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

In Conclusion...

In summary, Sirius XM Holdings isn't compounding its earnings but is generating decent returns on the same amount of capital employed. And in the last five years, the stock has given away 56% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sirius XM Holdings has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Sirius XM Holdings (including 1 which doesn't sit too well with us) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.