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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Atlas Engineered Products' (CVE:AEP) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Atlas Engineered Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CA$3.5m ÷ (CA$84m - CA$8.7m) (Based on the trailing twelve months to September 2024).
So, Atlas Engineered Products has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Forestry industry average of 14%.
View our latest analysis for Atlas Engineered Products
In the above chart we have measured Atlas Engineered Products' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Atlas Engineered Products .
What Can We Tell From Atlas Engineered Products' ROCE Trend?
Atlas Engineered Products has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Atlas Engineered Products is utilizing 432% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Atlas Engineered Products has decreased current liabilities to 10% 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.