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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, we've noticed some promising trends at Avingtrans (LON:AVG) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Avingtrans, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = UK£8.0m ÷ (UK£181m - UK£51m) (Based on the trailing twelve months to November 2023).
So, Avingtrans has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 14%.
Check out our latest analysis for Avingtrans
Above you can see how the current ROCE for Avingtrans 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 Avingtrans for free.
How Are Returns Trending?
Avingtrans has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.2% on its capital. In addition to that, Avingtrans is employing 66% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On Avingtrans' ROCE
In summary, it's great to see that Avingtrans has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 72% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Avingtrans does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...