If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, we've noticed some promising trends at AMREP (NYSE:AXR) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on AMREP is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$1.4m ÷ (US$96m - US$4.1m) (Based on the trailing twelve months to January 2021).
Therefore, AMREP has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for AMREP's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AMREP, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
It's great to see that AMREP has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, AMREP is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
In the end, AMREP has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 144% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if AMREP can keep these trends up, it could have a bright future ahead.
Like most companies, AMREP does come with some risks, and we've found 2 warning signs that you should be aware of.
While AMREP 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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