What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Acer Cyber Security (GTSM:6690) looks quite promising in regards to its trends of return on capital.
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 Acer Cyber Security, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = NT$89m ÷ (NT$815m - NT$217m) (Based on the trailing twelve months to September 2020).
Thus, Acer Cyber Security has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.
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 Acer Cyber Security's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Acer Cyber Security Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Acer Cyber Security. We found that the returns on capital employed over the last four years have risen by 112%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 72% less than it was four years ago, which can be indicative of a business that's improving its efficiency. Acer Cyber Security may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On Acer Cyber Security's ROCE
In summary, it's great to see that Acer Cyber Security has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 35% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we found 2 warning signs for Acer Cyber Security (1 is concerning) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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