Investors Will Want Aeris Environmental's (ASX:AEI) Growth In ROCE To Persist

By
Simply Wall St
Published
May 31, 2021
ASX:AEI
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at Aeris Environmental (ASX:AEI) so let's look a bit deeper.

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. To calculate this metric for Aeris Environmental, this is the formula:

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

0.066 = AU$1.2m ÷ (AU$20m - AU$2.6m) (Based on the trailing twelve months to December 2020).

Therefore, Aeris Environmental has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.0%.

Check out our latest analysis for Aeris Environmental

roce
ASX:AEI Return on Capital Employed May 31st 2021

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're interested in investigating Aeris Environmental's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Aeris Environmental's ROCE Trend?

We're delighted to see that Aeris Environmental is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.6% on its capital. In addition to that, Aeris Environmental is employing 184% 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.

The Bottom Line On Aeris Environmental's ROCE

Overall, Aeris Environmental gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 61% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 3 warning signs for Aeris Environmental (1 shouldn't be ignored) you should be aware of.

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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