To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Atari's (EPA:ATA) returns on capital, so let's have a look.
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. To calculate this metric for Atari, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = €2.8m ÷ (€44m - €12m) (Based on the trailing twelve months to March 2020).
So, Atari has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Entertainment industry average of 8.4%.
In the above chart we have measured Atari'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 Atari.
So How Is Atari's ROCE 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 four years to 8.8%. The amount of capital employed has increased too, by 713%. So we're very much inspired by what we're seeing at Atari thanks to its ability to profitably reinvest capital.In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 27%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Atari has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Atari's ROCE
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 Atari has. And with a respectable 83% awarded to those who held the stock over the last five years, you could argue that these trends are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you want to know some of the risks facing Atari we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While Atari 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.
If you decide to trade Atari, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.