What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So, when we ran our eye over Audience Analytics’ (Catalist:1AZ) trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Audience Analytics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.44 = S$7.1m ÷ (S$19m – S$3.2m) (Based on the trailing twelve months to December 2022).
Therefore, Audience Analytics has an ROCE of 44%. In absolute terms that’s a great return and it’s even better than the Media industry average of 8.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Audience Analytics’ ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of Audience Analytics, check out these free graphs here.
How Are Returns Trending?
In terms of Audience Analytics’ history of ROCE, it’s quite impressive. Over the past four years, ROCE has remained relatively flat at around 44% and the business has deployed 248% more capital into its operations. Now considering ROCE is an attractive 44%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner’s perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
In short, we’d argue Audience Analytics has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it’s no surprise that shareholders have earned a respectable 20% return if they held over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing: We’ve identified 3 warning signs with Audience Analytics (at least 1 which can’t be ignored) , and understanding them would certainly be useful.
Audience Analytics is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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