If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at ALS (ASX:ALQ) so let's look a bit deeper.
Understanding 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 ALS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = AU$404m ÷ (AU$3.2b - AU$465m) (Based on the trailing twelve months to September 2022).
Therefore, ALS has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.
View our latest analysis for ALS
In the above chart we have measured ALS' 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 ALS.
The Trend Of ROCE
Investors would be pleased with what's happening at ALS. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 45%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In Conclusion...
All in all, it's terrific to see that ALS is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last five years. In light of that, we think it's worth looking further into this stock because if ALS can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with ALS and understanding these should be part of your investment process.
While ALS isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.