Aquis Entertainment (ASX:AQS) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Aquis Entertainment (ASX:AQS) 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 Aquis Entertainment, this is the formula:

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

0.21 = AU$3.0m ÷ (AU$19m - AU$4.4m) (Based on the trailing twelve months to December 2020).

Therefore, Aquis Entertainment has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 8.1%.

See our latest analysis for Aquis Entertainment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aquis Entertainment's ROCE against it's prior returns. If you're interested in investigating Aquis Entertainment's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Aquis Entertainment has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 21% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Key Takeaway

In summary, we're delighted to see that Aquis Entertainment has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Aquis Entertainment (of which 2 can't be ignored!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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