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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating AstroNova (NASDAQ:ALOT), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AstroNova, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$2.4m ÷ (US$115m - US$21m) (Based on the trailing twelve months to January 2021).
Thus, AstroNova has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 7.0%.
In the above chart we have measured AstroNova's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AstroNova here for free.
So How Is AstroNova's ROCE Trending?
In terms of AstroNova's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.8%, but since then they've fallen to 2.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
In summary, we're somewhat concerned by AstroNova's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 9.0% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing: We've identified 2 warning signs with AstroNova (at least 1 which is significant) , and understanding them would certainly be useful.
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.
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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