There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Austin Engineering (ASX:ANG) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Austin Engineering is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = AU$12m ÷ (AU$180m - AU$67m) (Based on the trailing twelve months to June 2020).
Therefore, Austin Engineering has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.
View our latest analysis for Austin Engineering
In the above chart we have measured Austin Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Austin Engineering.
So How Is Austin Engineering's ROCE Trending?
We're delighted to see that Austin Engineering is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 11% on their capital employed. Additionally, the business is utilizing 36% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
The Key Takeaway
In a nutshell, we're pleased to see that Austin Engineering has been able to generate higher returns from less capital. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Austin Engineering does come with some risks, and we've found 2 warning signs that you should be aware of.
While Austin Engineering isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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.
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