Returns On Capital At AudioCodes (NASDAQ:AUDC) Paint A Concerning Picture
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at AudioCodes (NASDAQ:AUDC), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for AudioCodes:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$16m ÷ (US$329m - US$87m) (Based on the trailing twelve months to September 2023).
Therefore, AudioCodes has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.9% average generated by the Communications industry.
View 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
When we looked at the ROCE trend at AudioCodes, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like AudioCodes might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
In summary, AudioCodes is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 9.8% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we found 2 warning signs for AudioCodes (1 makes us a bit uncomfortable) you should be aware of.
While AudioCodes 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.
