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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Autoscope Technologies (NASDAQ:AATC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 Autoscope Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$1.9m ÷ (US$21m - US$719k) (Based on the trailing twelve months to September 2021).
Therefore, Autoscope Technologies has an ROCE of 9.2%. On its own, that's a low figure but it's around the 10.0% average generated by the Electronic industry.
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 want to delve into the historical earnings, revenue and cash flow of Autoscope Technologies, check out these free graphs here.
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 9.2% from 16% five years ago. However it looks like Autoscope Technologies 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.
On a side note, Autoscope Technologies has done well to pay down its current liabilities to 3.4% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
To conclude, we've found that Autoscope Technologies is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 85% over the last five years. 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've found 3 warning signs for Autoscope Technologies that we think you should be aware of.
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.
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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.