Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Acme United (NYSEMKT:ACU), we don’t think it’s current trends fit the mold of a multi-bagger.
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. To calculate this metric for Acme United, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.094 = US$8.9m ÷ (US$108m – US$13m) (Based on the trailing twelve months to March 2020).
So, Acme United has an ROCE of 9.4%. On its own, that’s a low figure but it’s around the 11% average generated by the Commercial Services industry.
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’d like to look at how Acme United has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The returns on capital haven’t changed much for Acme United in recent years. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 9.4%. This poor ROCE doesn’t inspire confidence right now, and with the increase in capital employed, it’s evident that the business isn’t deploying the funds into high return investments.
Our Take On Acme United’s ROCE
In conclusion, Acme United has been investing more capital into the business, but returns on that capital haven’t increased. And with the stock having returned a mere 33% in the last five years to shareholders, you could argue that they’re aware of these lackluster trends. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you’d like to know more about Acme United, we’ve spotted 3 warning signs, and 1 of them is potentially serious.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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