If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Aussie Broadband (ASX:ABB) and its trend of ROCE, we really liked what we saw.
Understanding 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 Aussie Broadband:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = AU$8.3m ÷ (AU$277m - AU$66m) (Based on the trailing twelve months to December 2021).
Thus, Aussie Broadband has an ROCE of 3.9%. On its own, that's a low figure but it's around the 3.4% average generated by the Telecom industry.
In the above chart we have measured Aussie Broadband's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aussie Broadband here for free.
How Are Returns Trending?
We're delighted to see that Aussie Broadband is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 3.9% which is a sight for sore eyes. Not only that, but the company is utilizing 6,855% more capital than before, but that's to be expected from a company 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.
One more thing to note, Aussie Broadband has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Aussie Broadband has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Aussie Broadband's ROCE
Overall, Aussie Broadband gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 86% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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.
Aussie Broadband does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...
While Aussie Broadband 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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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.