To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Aramex PJSC (DFM:ARMX) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
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 Aramex PJSC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = د.إ626m ÷ (د.إ5.6b - د.إ2.0b) (Based on the trailing twelve months to September 2020).
So, Aramex PJSC has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 7.8% it's much better.
View our latest analysis for Aramex PJSC
In the above chart we have measured Aramex PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 48% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 36% of total assets, this reported ROCE would probably be less than17% because total capital employed would be higher.The 17% ROCE could be even lower if current liabilities weren't 36% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
What We Can Learn From Aramex PJSC's ROCE
The main thing to remember is that Aramex PJSC has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 44% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a separate note, we've found 2 warning signs for Aramex PJSC 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. 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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About DFM:ARMX
Aramex PJSC
Engages in the investment of freight, express, logistics, and supply chain management businesses in the United Arab Emirates, the Middle East, North Africa, Turkey, East and South Africa, Europe, North America, North and South Asia, and Oceania.
Proven track record and fair value.
