These Trends Paint A Bright Future For Addvalue Technologies (SGX:A31)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Addvalue Technologies (SGX:A31) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Addvalue Technologies is:

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

0.24 = US$2.4m ÷ (US$20m - US$9.5m) (Based on the trailing twelve months to September 2020).

So, Addvalue Technologies has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.

See our latest analysis for Addvalue Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Addvalue Technologies' ROCE against it's prior returns. If you'd like to look at how Addvalue Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Addvalue Technologies' ROCE Trending?

Like most people, we're pleased that Addvalue Technologies is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 30% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In the end, Addvalue Technologies has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 47% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Addvalue Technologies we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

Addvalue Technologies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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