Should We Be Excited About The Trends Of Returns At AURES Technologies (EPA:AURS)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating AURES Technologies (EPA:AURS), we don't think it's current trends fit the mold of a multi-bagger.

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 AURES Technologies:

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

0.048 = €2.8m ÷ (€83m - €26m) (Based on the trailing twelve months to June 2020).

So, AURES Technologies has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 5.6%.

View our latest analysis for AURES Technologies

In the above chart we have measured AURES Technologies' 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 AURES Technologies.

What Can We Tell From AURES Technologies' ROCE Trend?

When we looked at the ROCE trend at AURES Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 4.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, AURES Technologies has decreased its current liabilities to 31% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On AURES Technologies' ROCE

To conclude, we've found that AURES Technologies is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 69% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

AURES Technologies does have some risks though, and we've spotted 4 warning signs for AURES Technologies that you might be interested in.

While AURES Technologies 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. 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.
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