If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Addentax Group's (NASDAQ:ATXG) 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 Addentax Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00087 = US$21k ÷ (US$32m - US$8.6m) (Based on the trailing twelve months to September 2022).
Therefore, Addentax Group has an ROCE of 0.09%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 13%.
Check out our latest analysis for Addentax Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Addentax Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Addentax Group, check out these free graphs here.
So How Is Addentax Group's ROCE Trending?
The fact that Addentax Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making one year ago but is is now generating 0.09% on its capital. Not only that, but the company is utilizing 434% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Addentax Group has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
To the delight of most shareholders, Addentax Group has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.