Is There More Growth In Store For AqualisBraemar LOC's (OB:AQUA) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 when we looked at AqualisBraemar LOC (OB:AQUA) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for AqualisBraemar LOC:

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

0.055 = US$4.3m ÷ (US$119m - US$40m) (Based on the trailing twelve months to December 2020).

So, AqualisBraemar LOC has an ROCE of 5.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

Check out our latest analysis for AqualisBraemar LOC

Above you can see how the current ROCE for AqualisBraemar LOC compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AqualisBraemar LOC here for free.

What Does the ROCE Trend For AqualisBraemar LOC Tell Us?

AqualisBraemar LOC has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.5% which is a sight for sore eyes. In addition to that, AqualisBraemar LOC is employing 105% more capital than previously which is expected of a company that's 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

Long story short, we're delighted to see that AqualisBraemar LOC's reinvestment activities have paid off and the company is now profitable. And a remarkable 334% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 6 warning signs with AqualisBraemar LOC and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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