Electro-Sensors (NASDAQ:ELSE) Is Looking To Continue Growing Its Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Electro-Sensors' (NASDAQ:ELSE) returns on capital, so let's have a look.
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. To calculate this metric for Electro-Sensors, this is the formula:
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).
Therefore, 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 11%.
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're interested in investigating Electro-Sensors' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Electro-Sensors' ROCE Trend?
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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On Electro-Sensors' ROCE
To sum it up, Electro-Sensors is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 36% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Electro-Sensors does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Electro-Sensors 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.