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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So while Advanced Enzyme Technologies (NSE:ADVENZYMES) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Advanced Enzyme Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = ₹1.8b ÷ (₹9.8b - ₹650m) (Based on the trailing twelve months to June 2020).
Therefore, Advanced Enzyme Technologies has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.
In the above chart we have measured Advanced Enzyme 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 Advanced Enzyme Technologies.
What Does the ROCE Trend For Advanced Enzyme Technologies Tell Us?
On the surface, the trend of ROCE at Advanced Enzyme Technologies doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 33% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.On a related note, Advanced Enzyme Technologies has decreased its current liabilities to 6.6% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.
Our Take On Advanced Enzyme Technologies' ROCE
Bringing it all together, while we're somewhat encouraged by Advanced Enzyme Technologies' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last three years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Advanced Enzyme Technologies does have some risks though, and we've spotted 2 warning signs for Advanced Enzyme Technologies that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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