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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in Acusensus' (ASX:ACE) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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 Acusensus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0025 = AU$93k ÷ (AU$47m - AU$9.0m) (Based on the trailing twelve months to December 2023).
Therefore, Acusensus has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.
Check out our latest analysis for Acusensus
In the above chart we have measured Acusensus' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Acusensus for free.
So How Is Acusensus' ROCE Trending?
The fact that Acusensus is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 0.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Acusensus is utilizing 315% more capital than it was three years ago. 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
To the delight of most shareholders, Acusensus has now broken into profitability. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Acusensus does have some risks though, and we've spotted 2 warning signs for Acusensus that you might be interested in.
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.