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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Australian Agricultural Projects (ASX:AAP) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Australian Agricultural Projects, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = AU$1.4m ÷ (AU$22m - AU$3.5m) (Based on the trailing twelve months to June 2024).
Thus, Australian Agricultural Projects has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.
View our latest analysis for Australian Agricultural Projects
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'd like to look at how Australian Agricultural Projects has performed in the past in other metrics, you can view this free graph of Australian Agricultural Projects' past earnings, revenue and cash flow.
So How Is Australian Agricultural Projects' ROCE Trending?
Australian Agricultural Projects has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 7.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Australian Agricultural Projects is utilizing 96% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Australian Agricultural Projects has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.