The Returns On Capital At Autoscope Technologies (NASDAQ:AATC) Don't Inspire Confidence
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Autoscope Technologies (NASDAQ:AATC) and its ROCE trend, we weren't exactly thrilled.
What is 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. Analysts use this formula to calculate it for Autoscope Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$1.9m ÷ (US$22m - US$1.0m) (Based on the trailing twelve months to March 2022).
So, Autoscope Technologies has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.
View our latest analysis for Autoscope Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for Autoscope Technologies' ROCE against it's prior returns. If you'd like to look at how Autoscope Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Autoscope Technologies' ROCE Trend?
On the surface, the trend of ROCE at Autoscope Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Autoscope Technologies has done well to pay down its current liabilities to 4.6% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Autoscope Technologies' ROCE
Bringing it all together, while we're somewhat encouraged by Autoscope Technologies' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 4 warning signs for Autoscope Technologies (1 is significant) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
