Is There More Growth In Store For A-Sonic Aerospace's (SGX:BTJ) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at A-Sonic Aerospace (SGX:BTJ) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for A-Sonic Aerospace, this is the formula:

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

0.12 = US$3.7m ÷ (US$67m - US$35m) (Based on the trailing twelve months to June 2020).

Therefore, A-Sonic Aerospace has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 7.6% it's much better.

See our latest analysis for A-Sonic Aerospace

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating A-Sonic Aerospace's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For A-Sonic Aerospace Tell Us?

We're delighted to see that A-Sonic Aerospace is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 12% on its capital. While returns have increased, the amount of capital employed by A-Sonic Aerospace has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, A-Sonic Aerospace's current liabilities are still rather high at 52% of total assets. 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.

What We Can Learn From A-Sonic Aerospace's ROCE

To bring it all together, A-Sonic Aerospace has done well to increase the returns it's generating from its capital employed. Given the stock has declined 58% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 3 warning signs facing A-Sonic Aerospace that you might find interesting.

While A-Sonic Aerospace may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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