Some Investors May Be Worried About AB Dynamics' (LON:ABDP) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 AB Dynamics (LON:ABDP), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AB Dynamics:

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

0.048 = UK£6.0m ÷ (UK£171m - UK£45m) (Based on the trailing twelve months to February 2023).

Thus, AB Dynamics has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 9.8%.

See our latest analysis for AB Dynamics

Above you can see how the current ROCE for AB Dynamics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AB Dynamics.

The Trend Of ROCE

When we looked at the ROCE trend at AB Dynamics, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.8% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On AB Dynamics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that AB Dynamics is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% 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.

One more thing, we've spotted 1 warning sign facing AB Dynamics that you might find interesting.

While AB Dynamics 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.