To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at Aztech Global’s (SGX:8AZ) ROCE trend, we were very happy with 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. To calculate this metric for Aztech Global, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.39 = S$122m ÷ (S$673m – S$361m) (Based on the trailing twelve months to September 2022).
Thus, Aztech Global has an ROCE of 39%. That’s a fantastic return and not only that, it outpaces the average of 9.0% earned by companies in a similar industry.
Check out our latest analysis for Aztech Global
Above you can see how the current ROCE for Aztech Global compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Aztech Global.
How Are Returns Trending?
Aztech Global deserves to be commended in regards to it’s returns. The company has employed 486% more capital in the last four years, and the returns on that capital have remained stable at 39%. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, Aztech Global has done well to reduce current liabilities to 54% of total assets over the last four years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 54%, some of that risk is still prevalent.
What We Can Learn From Aztech Global’s ROCE
Aztech Global has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And given the stock has only risen 0.9% over the last year, we’d suspect the market is beginning to recognize these trends. That’s why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing, we’ve spotted 1 warning sign facing Aztech Global that you might find interesting.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
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