Investors Will Want Dassault Aviation Société anonyme's (EPA:AM) Growth In ROCE To Persist

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. 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. With that in mind, we've noticed some promising trends at Dassault Aviation Société anonyme (EPA:AM) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Dassault Aviation Société anonyme:

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

0.097 = €576m ÷ (€19b - €13b) (Based on the trailing twelve months to June 2022).

Therefore, Dassault Aviation Société anonyme has an ROCE of 9.7%. On its own, that's a low figure but it's around the 8.7% average generated by the Aerospace & Defense industry.

Check out our latest analysis for Dassault Aviation Société anonyme

In the above chart we have measured Dassault Aviation Société anonyme's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Dassault Aviation Société anonyme.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 27%. So we're very much inspired by what we're seeing at Dassault Aviation Société anonyme thanks to its ability to profitably reinvest capital.

On a side note, Dassault Aviation Société anonyme's current liabilities are still rather high at 69% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Dassault Aviation Société anonyme has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

While Dassault Aviation Société anonyme looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AM is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.