Stock Analysis

Investors Will Want Atomos' (ASX:AMS) Growth In ROCE To Persist

ASX:AMS
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Atomos' (ASX:AMS) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Atomos is:

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

0.049 = AU$3.5m ÷ (AU$99m - AU$27m) (Based on the trailing twelve months to December 2021).

So, Atomos has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 14%.

Check out our latest analysis for Atomos

roce
ASX:AMS Return on Capital Employed July 23rd 2022

Above you can see how the current ROCE for Atomos compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Atomos here for free.

What Does the ROCE Trend For Atomos Tell Us?

The fact that Atomos is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 4.9% which is a sight for sore eyes. In addition to that, Atomos is employing 446% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Atomos' ROCE

To the delight of most shareholders, Atomos has now broken into profitability. And since the stock has dived 77% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Atomos (of which 2 shouldn't be ignored!) that you should know about.

While Atomos 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.

Valuation is complex, but we're helping make it simple.

Find out whether Atomos is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.