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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Aimtron Electronics (NSE:AIMTRON), it didn't seem to tick all of these boxes.
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. To calculate this metric for Aimtron Electronics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₹229m ÷ (₹1.7b - ₹286m) (Based on the trailing twelve months to September 2024).
Thus, Aimtron Electronics has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Electronic industry.
Check out our latest analysis for Aimtron Electronics
Historical performance is a great place to start when researching a stock so above you can see the gauge for Aimtron Electronics' ROCE against it's prior returns. If you'd like to look at how Aimtron Electronics has performed in the past in other metrics, you can view this free graph of Aimtron Electronics' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Aimtron Electronics' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 40% over the last three years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Aimtron Electronics has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Aimtron Electronics is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 24% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we found 3 warning signs for Aimtron Electronics (2 make us uncomfortable) you should be aware of.
While Aimtron Electronics 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. 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.