Will Avensia's (STO:AVEN) Growth In ROCE Persist?

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Avensia's (STO:AVEN) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Avensia:

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

0.20 = kr17m ÷ (kr160m - kr76m) (Based on the trailing twelve months to September 2020).

So, Avensia has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 15% generated by the Software industry.

View our latest analysis for Avensia

Above you can see how the current ROCE for Avensia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Avensia.

The Trend Of ROCE

Avensia 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 20% which is a sight for sore eyes. In addition to that, Avensia is employing 430% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, Avensia's current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Avensia's ROCE

Overall, Avensia gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 273% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Avensia can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Avensia, we've discovered 5 warning signs that you should be aware of.

While Avensia 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. 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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