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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 AVJennings (ASX:AVJ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 AVJennings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = AU$17m ÷ (AU$930m - AU$93m) (Based on the trailing twelve months to December 2023).
Therefore, AVJennings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 19%.
Check out our latest analysis for AVJennings
In the above chart we have measured AVJennings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AVJennings for free.
How Are Returns Trending?
We weren't thrilled with the trend because AVJennings' ROCE has reduced by 40% over the last five years, while the business employed 45% more capital. Usually this isn't ideal, but given AVJennings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with AVJennings' earnings and if they change as a result from the capital raise.
Our Take On AVJennings' ROCE
In summary, AVJennings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.