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Investors Shouldn't Overlook Applied Industrial Technologies' (NYSE:AIT) Impressive Returns On Capital

Simply Wall St
·3-min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Applied Industrial Technologies' (NYSE:AIT) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Applied Industrial Technologies, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.21 = US$454m ÷ (US$2.6b - US$481m) (Based on the trailing twelve months to March 2023).

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So, Applied Industrial Technologies has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 14%.

View our latest analysis for Applied Industrial Technologies

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In the above chart we have measured Applied Industrial Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Applied Industrial Technologies.

What Can We Tell From Applied Industrial Technologies' ROCE Trend?

Applied Industrial Technologies is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 94% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Applied Industrial Technologies' ROCE

In summary, we're delighted to see that Applied Industrial Technologies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 97% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Applied Industrial Technologies looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AIT is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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