Returns On Capital Signal Tricky Times Ahead For Allied Motion Technologies (NASDAQ:AMOT)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at Allied Motion Technologies (NASDAQ:AMOT), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Allied Motion Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$25m ÷ (US$494m - US$79m) (Based on the trailing twelve months to March 2022).
Thus, Allied Motion Technologies has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 9.6%.
See our latest analysis for Allied Motion Technologies
In the above chart we have measured Allied Motion Technologies' 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 Allied Motion Technologies here for free.
What Can We Tell From Allied Motion Technologies' ROCE Trend?
In terms of Allied Motion Technologies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Allied Motion Technologies' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Allied Motion Technologies. And the stock has followed suit returning a meaningful 44% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
One final note, you should learn about the 4 warning signs we've spotted with Allied Motion Technologies (including 1 which is a bit concerning) .
While Allied Motion Technologies 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.
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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.
