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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Aquirian (ASX:AQN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Aquirian, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = AU$889k ÷ (AU$24m - AU$5.5m) (Based on the trailing twelve months to December 2023).
Therefore, Aquirian has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 15%.
See our latest analysis for Aquirian
Historical performance is a great place to start when researching a stock so above you can see the gauge for Aquirian's ROCE against it's prior returns. If you're interested in investigating Aquirian's past further, check out this free graph covering Aquirian's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Aquirian doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Aquirian has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Aquirian's ROCE
To conclude, we've found that Aquirian is reinvesting in the business, but returns have been falling. Since the stock has declined 22% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Aquirian has the makings of a multi-bagger.