What trends should we look for when we want to identify stocks that can multiply in value over the long term? First, we want to see a growing return on the capital employed (ROCE) and then alongside it an ever increasing base of the capital invested. Simply put, these types of companies are compound interest machines, meaning that they continually reinvest their profits at ever higher rates of return. Although, as we look Aquirian (ASX:AQN) didn’t seem to tick all of those boxes.
Return on Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return) relative to the capital employed in the business. To calculate this metric for Aquirian, the formula is:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.048 = AU$889,000 ÷ (AU$24 million – AU$5.5 million) (Based on the last twelve months to December 2023).
Therefore, Aquirian has a ROCE of 4.8%. Ultimately, this is a low return and below the professional services industry average of 16%.
Check out our latest analysis for Aquirian
While the past is not representative of the future, it can be helpful to know a company’s historical performance, which is why we have this chart above. If you want to dig deeper into Aquirian’s past, read this free Graph of Aquirian’s past earnings, revenue and cash flow.
The trend of ROCE
As for Aquirian’s historical ROCE movements, the trend is not fantastic. Over the past three years, the return on capital has dropped to 4.8% from 23% three years ago. On the other hand, the company has deployed more capital over the past year without a corresponding improvement in revenues, which may indicate that these investments are for the longer term. It may take some time for the company to see a change in the returns from these investments.
On a related note, Aquirian has reduced its current liabilities to 23% of total assets. This may partially explain why ROCE has fallen. In effect, this means that its suppliers or short-term creditors are putting less money into the business, which reduces some elements of risk. Some would argue that this reduces the company’s efficiency in generating ROCE, as it is now funding more of its operations with its own money.
What we can learn from Aquirian’s ROCE
Finally, we found that while Aquirian is reinvesting in the business, earnings are declining. Unsurprisingly, then, total shareholder returns have been flat over the past three years. All in all, the inherent trends are not typical of multibaggers, so if that’s what you’re after, we think you might have better luck elsewhere.
And one more thing: We have found 3 warning signs with Aquirian (at least two that are potentially serious), and it would certainly be useful to understand them.
While Aquirian may not have the highest returns right now, we have compiled a list of companies that are currently generating more than 25% return on equity. Check it out free List here.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
