If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. 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. So when we looked at the ROCE trend of Aquis Entertainment (ASX:AQS) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Aquis Entertainment:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = AU$3.0m ÷ (AU$19m – AU$4.4m) (Based on the trailing twelve months to December 2020).
Therefore, Aquis Entertainment has an ROCE of 21%. That’s a fantastic return and not only that, it outpaces the average of 6.6% earned by companies in a similar industry.
See our latest analysis for Aquis Entertainment
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Aquis Entertainment, check out these free graphs here.
The Trend Of ROCE
Shareholders will be relieved that Aquis Entertainment has broken into profitability. The company now earns 21% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we’re happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Key Takeaway
In summary, we’re delighted to see that Aquis Entertainment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 200% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it’s worth looking further into this stock because if Aquis Entertainment can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 4 warning signs we’ve spotted with Aquis Entertainment (including 2 which don’t sit too well with us) .
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
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