Investors Shouldn't Overlook Atlas Pearls' (ASX:ATP) Impressive Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 the ROCE trend of Atlas Pearls (ASX:ATP) we really liked what we saw.

What Is 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. The formula for this calculation on Atlas Pearls is:

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

0.27 = AU$9.6m ÷ (AU$40m - AU$3.9m) (Based on the trailing twelve months to June 2023).

So, Atlas Pearls has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Luxury industry average of 9.8%.

View our latest analysis for Atlas Pearls

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 want to delve into the historical earnings, revenue and cash flow of Atlas Pearls, check out these free graphs here.

So How Is Atlas Pearls' ROCE Trending?

Atlas Pearls has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 27% on its capital. Not only that, but the company is utilizing 34% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Atlas Pearls' ROCE

Overall, Atlas Pearls gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 126% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Atlas Pearls can keep these trends up, it could have a bright future ahead.

Like most companies, Atlas Pearls does come with some risks, and we've found 1 warning sign that you should be aware of.

Atlas Pearls is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.