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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ardiden (ASX:ADV) looks quite promising in regards to its trends of return on capital.
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 Ardiden is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = AU$4.4m ÷ (AU$32m - AU$85k) (Based on the trailing twelve months to December 2024).
Therefore, Ardiden has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Metals and Mining industry.
See our latest analysis for Ardiden
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ardiden's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ardiden.
The Trend Of ROCE
We're delighted to see that Ardiden is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 14% on its capital. Not only that, but the company is utilizing 150% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Overall, Ardiden gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 4.7% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ardiden (of which 2 are potentially serious!) that you should know about.