AudioCodes (NASDAQ:AUDC) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at AudioCodes (NASDAQ:AUDC) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on AudioCodes is:

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

0.084 = US$21m ÷ (US$330m - US$77m) (Based on the trailing twelve months to June 2024).

So, AudioCodes has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Communications industry average of 9.6%.

See our latest analysis for AudioCodes

Above you can see how the current ROCE for AudioCodes 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 analyst report for AudioCodes .

The Trend Of ROCE

When we looked at the ROCE trend at AudioCodes, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However it looks like AudioCodes might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From AudioCodes' ROCE

Bringing it all together, while we're somewhat encouraged by AudioCodes' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to continue researching AudioCodes, you might be interested to know about the 1 warning sign that our analysis has discovered.

While AudioCodes 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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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.