Returns On Capital Are Showing Encouraging Signs At Audinate Group (ASX:AD8)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Audinate Group (ASX:AD8) and its trend of ROCE, 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 Audinate Group, this is the formula:

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

0.0047 = AU$436k ÷ (AU$107m - AU$14m) (Based on the trailing twelve months to June 2023).

Therefore, Audinate Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 16%.

See our latest analysis for Audinate Group

Above you can see how the current ROCE for Audinate Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Audinate Group here for free.

So How Is Audinate Group's ROCE Trending?

Audinate Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Audinate Group is utilizing 346% more capital than it was five years ago. 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.

What We Can Learn From Audinate Group's ROCE

In summary, it's great to see that Audinate Group has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 2 warning signs with Audinate Group (at least 1 which is concerning) , and understanding these would certainly be useful.

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.

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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.