There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating AVA Risk Group (ASX:AVA), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for AVA Risk Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0079 = AU$244k ÷ (AU$38m - AU$7.1m) (Based on the trailing twelve months to December 2024).
Therefore, AVA Risk Group has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 8.0%.
View our latest analysis for AVA Risk Group
In the above chart we have measured AVA Risk Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for AVA Risk Group .
What Can We Tell From AVA Risk Group's ROCE Trend?
We weren't thrilled with the trend because AVA Risk Group's ROCE has reduced by 25% over the last five years, while the business employed 37% more capital. That being said, AVA Risk Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. AVA Risk Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that AVA Risk Group is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 21% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a final note, we've found 1 warning sign for AVA Risk Group that we think you should be aware of.
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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.