Returns On Capital Are Showing Encouraging Signs At EROAD (NZSE:ERD)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 EROAD (NZSE:ERD) and its trend of ROCE, we really liked what we saw.

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 EROAD, this is the formula:

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

0.028 = NZ$6.1m ÷ (NZ$254m - NZ$39m) (Based on the trailing twelve months to September 2021).

Therefore, EROAD has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 14%.

See our latest analysis for EROAD

In the above chart we have measured EROAD'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 report for EROAD.

What Does the ROCE Trend For EROAD Tell Us?

We're delighted to see that EROAD is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.8% on its capital. And unsurprisingly, like most companies trying to break into the black, EROAD is utilizing 311% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that EROAD has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 92% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for EROAD that we think you should be aware of.

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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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.