Investors Will Want Advance NanoTek's (ASX:ANO) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Advance NanoTek (ASX:ANO) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Advance NanoTek, this is the formula:

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

0.022 = AU$670k ÷ (AU$34m - AU$3.9m) (Based on the trailing twelve months to June 2021).

So, Advance NanoTek has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 4.2%.

View our latest analysis for Advance NanoTek

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

The Trend Of ROCE

The fact that Advance NanoTek is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.2% which is a sight for sore eyes. In addition to that, Advance NanoTek is employing 551% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Advance NanoTek's ROCE

To the delight of most shareholders, Advance NanoTek has now broken into profitability. And a remarkable 1,778% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Advance NanoTek, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.