If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That’s why when we briefly looked at audius’ (FRA:3IT) ROCE trend, we were very happy with what we saw.
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 audius is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = €5.7m ÷ (€37m – €9.6m) (Based on the trailing twelve months to December 2023).
Thus, audius has an ROCE of 21%. That’s a fantastic return and not only that, it outpaces the average of 9.6% earned by companies in a similar industry.
See our latest analysis for audius
Above you can see how the current ROCE for audius 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 audius .
What The Trend Of ROCE Can Tell Us
audius deserves to be commended in regards to it’s returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 468% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. You’ll see this when looking at well operated businesses or favorable business models.
On a side note, audius has done well to reduce current liabilities to 26% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
In short, we’d argue audius has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 147% return to those who’ve held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you’d like to know more about audius, we’ve spotted 3 warning signs, and 1 of them shouldn’t be ignored.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
