If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at AeroEdge (TSE:7409) and its trend of ROCE, we really liked what we saw.
Understanding 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. The formula for this calculation on AeroEdge is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = JP¥538m ÷ (JP¥6.8b - JP¥1.1b) (Based on the trailing twelve months to March 2024).
Thus, AeroEdge has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.5% generated by the Aerospace & Defense industry, it's much better.
View our latest analysis for AeroEdge
In the above chart we have measured AeroEdge's 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 analyst report for AeroEdge .
The Trend Of ROCE
The fact that AeroEdge is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 9.4% which is a sight for sore eyes. Not only that, but the company is utilizing 26% more capital than before, but that's to be expected from a company trying to break into profitability. 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.
What We Can Learn From AeroEdge's ROCE
To the delight of most shareholders, AeroEdge has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 50% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, AeroEdge does come with some risks, and we've found 3 warning signs that you should be aware of.
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.
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About TSE:7409
Undervalued with high growth potential.
