There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Rectifier Technologies (ASX:RFT) and its ROCE trend, we weren’t exactly thrilled.

We’ve discovered 3 warning signs about Rectifier Technologies. View them for free.

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Rectifier Technologies:

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

0.16 = AU$3.5m ÷ (AU$31m – AU$9.5m) (Based on the trailing twelve months to December 2024).

Therefore, Rectifier Technologies has an ROCE of 16%. That’s a pretty standard return and it’s in line with the industry average of 16%.

Check out our latest analysis for Rectifier Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Rectifier Technologies.

When we looked at the ROCE trend at Rectifier Technologies, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 16% from 32% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.

Bringing it all together, while we’re somewhat encouraged by Rectifier Technologies’ reinvestment in its own business, we’re aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 81% in the last five years. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.