If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at ADT (NYSE:ADT) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for ADT, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = US$253m ÷ (US$16b - US$1.2b) (Based on the trailing twelve months to March 2020).
So, ADT has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.8%.
Above you can see how the current ROCE for ADT 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 ADT here for free.
What Can We Tell From ADT's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 1.7%. The amount of capital employed has increased too, by 163%. So we're very much inspired by what we're seeing at ADT thanks to its ability to profitably reinvest capital.
To sum it up, ADT has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 40% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you'd like to know about the risks facing ADT, we've discovered 3 warning signs that you should be aware of.
While ADT isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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