Can Aeris Environmental (ASX:AEI) Continue To Grow Its Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Aeris Environmental (ASX:AEI) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Aeris Environmental:

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

0.073 = AU$1.4m ÷ (AU$23m - AU$3.0m) (Based on the trailing twelve months to June 2020).

So, Aeris Environmental has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 12%.

See our latest analysis for Aeris Environmental

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aeris Environmental's ROCE against it's prior returns. If you're interested in investigating Aeris Environmental's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Aeris Environmental is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 7.3% on its capital. In addition to that, Aeris Environmental is employing 224% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To the delight of most shareholders, Aeris Environmental has now broken into profitability. Given the stock has declined 32% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 5 warning signs for Aeris Environmental (1 is a bit unpleasant) you should be aware of.

While Aeris Environmental may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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