What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don’t think Allied Motion Technologies (NASDAQ:AMOT) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 Allied Motion Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.092 = US$27m ÷ (US$338m – US$50m) (Based on the trailing twelve months to June 2020).
Therefore, Allied Motion Technologies has an ROCE of 9.2%. Even though it’s in line with the industry average of 9.2%, it’s still a low return by itself.
Above you can see how the current ROCE for Allied Motion Technologies 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 Allied Motion Technologies.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Allied Motion Technologies doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 9.2% from 20% five years ago. However it looks like Allied Motion Technologies might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Allied Motion Technologies’ ROCE
In summary, Allied Motion Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 146% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Like most companies, Allied Motion Technologies does come with some risks, and we’ve found 2 warning signs that you should be aware of.
While Allied Motion Technologies isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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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