Does RADA Electronic Industries (NASDAQ:RADA) Have The Makings Of A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, RADA Electronic Industries (NASDAQ:RADA) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for RADA Electronic Industries, this is the formula:

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

0.033 = US$2.5m ÷ (US$99m - US$23m) (Based on the trailing twelve months to September 2020).

Thus, RADA Electronic Industries has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.8%.

View our latest analysis for RADA Electronic Industries

Above you can see how the current ROCE for RADA Electronic Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is RADA Electronic Industries' ROCE Trending?

The fact that RADA Electronic Industries is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 3.3% which is a sight for sore eyes. Not only that, but the company is utilizing 549% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On RADA Electronic Industries' ROCE

To the delight of most shareholders, RADA Electronic Industries has now broken into profitability. And a remarkable 1,744% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for RADA Electronic Industries you'll probably want to know about.

While RADA Electronic Industries 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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