Altech Chemicals (ASX:ATC) Might Have The Makings Of A Multi-Bagger

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. 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 Altech Chemicals (ASX:ATC) and its trend of ROCE, 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. Analysts use this formula to calculate it for Altech Chemicals:

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

0.068 = AU$5.9m ÷ (AU$87m - AU$1.2m) (Based on the trailing twelve months to December 2020).

Therefore, Altech Chemicals has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.9%.

Check out our latest analysis for Altech Chemicals

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're interested in investigating Altech Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Altech Chemicals is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 6.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Altech Chemicals is utilizing 2,229% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 1.4%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Altech Chemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Long story short, we're delighted to see that Altech Chemicals' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 69% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Altech Chemicals, we've discovered 4 warning signs that you should be aware of.

While Altech Chemicals isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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