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There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 A-Sonic Aerospace (SGX:BTJ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on A-Sonic Aerospace is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$3.6m ÷ (US$88m - US$39m) (Based on the trailing twelve months to December 2024).
Thus, A-Sonic Aerospace has an ROCE of 7.4%. In absolute terms, that's a low return, but it's much better than the Logistics industry average of 4.5%.
Check out our latest analysis for A-Sonic Aerospace
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of A-Sonic Aerospace.
So How Is A-Sonic Aerospace's ROCE Trending?
When we looked at the ROCE trend at A-Sonic Aerospace, we didn't gain much confidence. Around five years ago the returns on capital were 9.5%, but since then they've fallen to 7.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, A-Sonic Aerospace has decreased its current liabilities to 44% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.