Yahoo Finance Atlas Engineered Products (CVE:AEP) Shareholders Will Want The ROCE Trajectory To Continue
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Atlas Engineered Products (CVE:AEP) so let's look a bit deeper.
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. To calculate this metric for Atlas Engineered Products, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = CA$5.3m ÷ (CA$79m - CA$7.9m) (Based on the trailing twelve months to December 2023).
So, Atlas Engineered Products has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 13%.
View our latest analysis for Atlas Engineered Products
Above you can see how the current ROCE for Atlas Engineered Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Atlas Engineered Products .
What The Trend Of ROCE Can Tell Us
The fact that Atlas Engineered Products is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 7.4% on its capital. In addition to that, Atlas Engineered Products is employing 444% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Atlas Engineered Products has decreased current liabilities to 10.0% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Atlas Engineered Products has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
In summary, it's great to see that Atlas Engineered Products has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 4 warning signs for Atlas Engineered Products (1 doesn't sit too well with us) you should be aware of.
While Atlas Engineered Products 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.
