Returns At Electro-Sensors (NASDAQ:ELSE) Are On The Way Up

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Electro-Sensors (NASDAQ:ELSE) looks quite promising in regards to its trends of return on capital.

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 Electro-Sensors is:

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

0.02 = US$259k ÷ (US$14m - US$895k) (Based on the trailing twelve months to September 2021).

So, Electro-Sensors has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10.0%.

View our latest analysis for Electro-Sensors

Historical performance is a great place to start when researching a stock so above you can see the gauge for Electro-Sensors' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Electro-Sensors, check out these free graphs here.

So How Is Electro-Sensors' ROCE Trending?

We're delighted to see that Electro-Sensors is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To bring it all together, Electro-Sensors has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 84% return over the last five years. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Electro-Sensors (of which 1 is significant!) that you should know about.

While Electro-Sensors 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. 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.