The Return Trends At Avingtrans (LON:AVG) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Avingtrans' (LON:AVG) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Avingtrans:

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

0.062 = UK£8.0m ÷ (UK£181m - UK£51m) (Based on the trailing twelve months to November 2023).

Therefore, Avingtrans has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

View our latest analysis for Avingtrans

Above you can see how the current ROCE for Avingtrans compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Avingtrans .

So How Is Avingtrans' ROCE Trending?

We're delighted to see that Avingtrans is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Avingtrans is utilizing 66% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

In summary, it's great to see that Avingtrans has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 89% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Avingtrans does have some risks though, and we've spotted 1 warning sign for Avingtrans that you might be interested in.

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.