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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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at A-Sonic Aerospace (SGX:BTJ) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for A-Sonic Aerospace, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$920k ÷ (US$87m - US$41m) (Based on the trailing twelve months to December 2023).
Therefore, A-Sonic Aerospace has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Logistics industry average of 7.4%.
See 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.
What Can We Tell From A-Sonic Aerospace's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 88%. So we're very much inspired by what we're seeing at A-Sonic Aerospace thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 47%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On A-Sonic Aerospace's ROCE
In summary, it's great to see that A-Sonic Aerospace can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if A-Sonic Aerospace can keep these trends up, it could have a bright future ahead.