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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Audinate Group's (ASX:AD8) returns on capital, so let's have a look.
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. The formula for this calculation on Audinate Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = AU$8.3m ÷ (AU$189m - AU$15m) (Based on the trailing twelve months to June 2024).
So, Audinate Group has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.8%.
Check out our latest analysis for Audinate Group
Above you can see how the current ROCE for Audinate Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Audinate Group .
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.7%. The amount of capital employed has increased too, by 322%. So we're very much inspired by what we're seeing at Audinate Group thanks to its ability to profitably reinvest capital.
The Bottom Line On Audinate Group's ROCE
To sum it up, Audinate Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 33% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Audinate Group does have some risks though, and we've spotted 2 warning signs for Audinate Group that you might be interested in.