Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Atea (OB:ATEA) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Atea, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = kr824m ÷ (kr14b - kr8.2b) (Based on the trailing twelve months to September 2020).
Therefore, Atea has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 12%.
In the above chart we have measured Atea's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Atea here for free.
So How Is Atea's ROCE Trending?
Investors would be pleased with what's happening at Atea. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.On a separate but related note, it's important to know that Atea has a current liabilities to total assets ratio of 59%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Atea's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Atea has. Since the stock has returned a staggering 109% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Atea can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing Atea that you might find interesting.
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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