AudioCodes (NASDAQ:AUDC) Might Have The Makings Of A Multi-Bagger
What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in AudioCodes' (NASDAQ:AUDC) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for AudioCodes:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$35m ÷ (US$321m - US$96m) (Based on the trailing twelve months to June 2022).
Thus, AudioCodes has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 8.7% it's much better.
Check out 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, you can check out the forecasts from the analysts covering AudioCodes here for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from AudioCodes. The data shows that returns on capital have increased substantially over the last five years to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On AudioCodes' ROCE
All in all, it's terrific to see that AudioCodes is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 217% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if AudioCodes can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with AudioCodes and understanding this should be part of your investment process.
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.
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