Ambertech (ASX:AMO) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at Ambertech (ASX:AMO) 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. Analysts use this formula to calculate it for Ambertech:

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

0.16 = AU$5.0m ÷ (AU$46m - AU$15m) (Based on the trailing twelve months to December 2021).

Therefore, Ambertech has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.

View our latest analysis for Ambertech

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

What Does the ROCE Trend For Ambertech Tell Us?

The trends we've noticed at Ambertech are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 164% more capital is being employed now too. So we're very much inspired by what we're seeing at Ambertech thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ambertech has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Ambertech's ROCE

All in all, it's terrific to see that Ambertech is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 143% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 5 warning signs for Ambertech that we think you should be aware of.

While Ambertech may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.