Atlas Pearls (ASX:ATP) Is Looking To Continue Growing Its 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Atlas Pearls (ASX:ATP) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Atlas Pearls, this is the formula:

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

0.14 = AU$3.8m ÷ (AU$32m - AU$5.1m) (Based on the trailing twelve months to June 2022).

Thus, Atlas Pearls has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Luxury industry.

Check out the opportunities and risks within the XX Luxury industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Atlas Pearls' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Atlas Pearls, check out these free graphs here.

What Can We Tell From Atlas Pearls' ROCE Trend?

Atlas Pearls has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 1,325% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Atlas Pearls' ROCE

In summary, we're delighted to see that Atlas Pearls has been able to increase efficiencies and earn higher rates of return on the same amount of capital.

If you'd like to know more about Atlas Pearls, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Atlas Pearls 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.