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There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Aerojet Rocketdyne Holdings (NYSE:AJRD) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Aerojet Rocketdyne Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$200m ÷ (US$2.9b - US$921m) (Based on the trailing twelve months to September 2020).
Therefore, Aerojet Rocketdyne Holdings has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.7%.
Above you can see how the current ROCE for Aerojet Rocketdyne Holdings 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 report for Aerojet Rocketdyne Holdings.
The Trend Of ROCE
The trends we've noticed at Aerojet Rocketdyne Holdings are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% 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.
Our Take On Aerojet Rocketdyne Holdings' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Aerojet Rocketdyne Holdings has. Since the stock has returned a staggering 110% 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 Aerojet Rocketdyne Holdings can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with Aerojet Rocketdyne Holdings and understanding it should be part of your investment process.
While Aerojet Rocketdyne Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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