To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in ATI's (NYSE:ATI) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ATI is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$347m ÷ (US$4.3b - US$823m) (Based on the trailing twelve months to September 2022).
Thus, ATI has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.
View our latest analysis for ATI
Above you can see how the current ROCE for ATI compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ATI here for free.
What Does the ROCE Trend For ATI Tell Us?
ATI has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 179%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line On ATI's ROCE
From what we've seen above, ATI has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
If you'd like to know more about ATI, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About NYSE:ATI
ATI
Produces and sells specialty materials and complex components worldwide.
Good value with adequate balance sheet.
