Investors Could Be Concerned With Aquirian's (ASX:AQN) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Aquirian (ASX:AQN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Aquirian is:

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

0.01 = AU$254k ÷ (AU$33m - AU$8.0m) (Based on the trailing twelve months to June 2024).

Therefore, Aquirian has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 19%.

View our latest analysis for Aquirian

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

The Trend Of ROCE

In terms of Aquirian's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 36%, but since then they've fallen to 1.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Aquirian has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Aquirian have fallen, meanwhile the business is employing more capital than it was four years ago. Investors must expect better things on the horizon though because the stock has risen 2.4% in the last three years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Aquirian (including 2 which are concerning) .

While Aquirian 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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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.