Austin Engineering (ASX:ANG) Is Doing The Right Things To Multiply Its Share Price

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, we've noticed some promising trends at Austin Engineering (ASX:ANG) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Austin Engineering is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = AU$16m ÷ (AU$184m - AU$80m) (Based on the trailing twelve months to December 2021).

So, Austin Engineering has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Machinery industry.

Check out our latest analysis for Austin Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Austin Engineering's ROCE against it's prior returns. If you'd like to look at how Austin Engineering has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Austin Engineering's ROCE Trend?

Like most people, we're pleased that Austin Engineering is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 15% on their capital employed. Additionally, the business is utilizing 41% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Austin Engineering could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Austin Engineering's ROCE

In summary, it's great to see that Austin Engineering has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. So with that in mind, we think the stock deserves further research.

On a separate note, we've found 2 warning signs for Austin Engineering you'll probably want to know about.

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. 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.