RADA Electronic Industries (NASDAQ:RADA) Shareholders Will Want The ROCE Trajectory To Continue

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Speaking of which, we noticed some great changes in RADA Electronic Industries' (NASDAQ:RADA) returns on capital, so let's have a look.

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)

0.063 = US$9.0m ÷ (US$170m - US$28m) (Based on the trailing twelve months to March 2021).

So, RADA Electronic Industries has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.9% average generated by the Aerospace & Defense industry.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for RADA Electronic Industries.

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. About five years ago the company was generating losses but things have turned around because it's now earning 6.3% on its capital. In addition to that, RADA Electronic Industries is employing 1,680% more capital than previously which is expected of a company that's 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.

One more thing to note, RADA Electronic Industries has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On RADA Electronic Industries' ROCE

In summary, it's great to see that RADA Electronic Industries has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 1,186% to shareholders over the last five years, it looks like investors are recognizing 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.

If you'd like to know about the risks facing RADA Electronic Industries, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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