Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for AeroEdge, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = JP¥635m ÷ (JP¥7.5b - JP¥735m) (Based on the trailing twelve months to September 2024).
Therefore, AeroEdge has an ROCE of 9.3%. On its own, that's a low figure but it's around the 8.0% average generated by the Aerospace & Defense industry.
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 .
How Are Returns Trending?
We're delighted to see that AeroEdge is reaping rewards from its investments and is now generating some pre-tax profits. About three years ago the company was generating losses but things have turned around because it's now earning 9.3% on its capital. Not only that, but the company is utilizing 46% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
In summary, it's great to see that AeroEdge has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 34% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about AeroEdge, we've spotted 2 warning signs, and 1 of them is significant.
While AeroEdge 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.
About TSE:7409
Good value with reasonable growth potential.
