What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Atlas Engineered Products (CVE:AEP) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. 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)
0.05 = CA$3.9m ÷ (CA$88m – CA$9.5m) (Based on the trailing twelve months to June 2024).
Therefore, Atlas Engineered Products has an ROCE of 5.0%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 5.0%.
Check out 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, you can check out the forecasts from the analysts covering Atlas Engineered Products for free.
What Can We Tell From Atlas Engineered Products’ ROCE Trend?
We’re delighted to see that Atlas Engineered Products is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it’s now earning 5.0% on its capital. Not only that, but the company is utilizing 466% 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, Atlas Engineered Products has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Atlas Engineered Products’ ROCE
To the delight of most shareholders, Atlas Engineered Products has now broken into profitability. Since the stock has returned a staggering 205% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it’s worth looking further into this stock because if Atlas Engineered Products can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 3 warning signs for Atlas Engineered Products you’ll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
