Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over ADvTECH's (JSE:ADH) trend of ROCE, we liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ADvTECH:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = R1.2b ÷ (R8.4b - R2.3b) (Based on the trailing twelve months to June 2022).
Therefore, ADvTECH has an ROCE of 19%. By itself that's a normal return on capital and it's in line with the industry's average returns of 19%.
See our latest analysis for ADvTECH
Historical performance is a great place to start when researching a stock so above you can see the gauge for ADvTECH's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ADvTECH, check out these free graphs here.
The Trend Of ROCE
While the current returns on capital are decent, they haven't changed much. The company has employed 71% more capital in the last five years, and the returns on that capital have remained stable at 19%. 19% is a pretty standard return, and it provides some comfort knowing that ADvTECH has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
To sum it up, ADvTECH has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 30% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
If you want to continue researching ADvTECH, you might be interested to know about the 1 warning sign that our analysis has discovered.
While ADvTECH may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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