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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Ainsworth Game Technology's (ASX:AGI) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Ainsworth Game Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = AU$29m ÷ (AU$423m - AU$56m) (Based on the trailing twelve months to June 2024).
Therefore, Ainsworth Game Technology has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.6% average generated by the Hospitality industry.
View our latest analysis for Ainsworth Game Technology
Above you can see how the current ROCE for Ainsworth Game Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ainsworth Game Technology for free.
So How Is Ainsworth Game Technology's ROCE Trending?
Ainsworth Game Technology has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 247% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On Ainsworth Game Technology's ROCE
As discussed above, Ainsworth Game Technology appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.7% to shareholders. So with that in mind, we think the stock deserves further research.