If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Montrose Environmental Group's (NYSE:MEG) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Montrose Environmental Group:

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

0.051 = US$28m ÷ (US$668m - US$115m) (Based on the trailing twelve months to September 2021).

Therefore, Montrose Environmental Group has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.6%.

See our latest analysis for Montrose Environmental Group

In the above chart we have measured Montrose Environmental Group'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 report on analyst forecasts for the company.

What Can We Tell From Montrose Environmental Group's ROCE Trend?

Montrose Environmental Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses two years ago, but now it's earning 5.1% which is a sight for sore eyes. In addition to that, Montrose Environmental Group is employing 129% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Montrose Environmental Group's ROCE

In summary, it's great to see that Montrose Environmental Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 34% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Montrose Environmental Group can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Montrose Environmental Group, we've discovered 2 warning signs that you should be aware of.

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.