Yahoo Finance We Think Atlas Pearls (ASX:ATP) Might Have The DNA Of A Multi-Bagger
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Atlas Pearls' (ASX:ATP) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Pearls, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = AU$9.5m ÷ (AU$40m - AU$3.9m) (Based on the trailing twelve months to June 2023).
Therefore, Atlas Pearls has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 9.2% earned by companies in a similar industry.
Check out our latest analysis for Atlas Pearls
Historical performance is a great place to start when researching a stock so above you can see the gauge for Atlas Pearls' ROCE against it's prior returns. If you're interested in investigating Atlas Pearls' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Atlas Pearls has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 26% on its capital. And unsurprisingly, like most companies trying to break into the black, Atlas Pearls is utilizing 34% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On Atlas Pearls' ROCE
Overall, Atlas Pearls gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting 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.
Atlas Pearls does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
