Will the Promising Trends At Academies Australasia Group (ASX:AKG) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Academies Australasia Group (ASX:AKG) looks quite promising in regards to its trends of return on capital.

What is 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. Analysts use this formula to calculate it for Academies Australasia Group:

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

0.061 = AU$4.4m ÷ (AU$102m - AU$31m) (Based on the trailing twelve months to June 2020).

So, Academies Australasia Group has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.9%.

See our latest analysis for Academies Australasia Group

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 Academies Australasia Group, check out these free graphs here.

What Can We Tell From Academies Australasia Group's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Academies Australasia Group's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Academies Australasia Group has. Since the stock has returned a solid 68% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Academies Australasia Group can keep these trends up, it could have a bright future ahead.

Academies Australasia Group does have some risks though, and we've spotted 3 warning signs for Academies Australasia Group that you might be interested in.

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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