Investors will want Aeris Environmental’s (ASX: AEI) ROCE growth to persist
Did you know that certain financial measures can provide clues about a possible multi-bagger? Ideally, a business will display two trends; first growth return on capital employed (ROCE) and, on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Aeris Environment (ASX: AEI) so let’s look a little deeper.
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 company. To calculate this metric for Aeris Environmental, here is the formula:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.066 = AU $ 1.2m ÷ (AU $ 20m – AU $ 2.6m) (Based on the last twelve months up to December 2020).
Therefore, Aeris Environmental has a ROCE of 6.6%. In the end, that’s a low return and underperforming the commercial services sector average of 9.0%.
Check out our latest analysis for Aeris Environmental
While the past is not representative of the future, it can be helpful to know how a business has behaved historically, which is why we have this graph above. If you want to dig deeper into Aeris Environmental’s past, check out this free graph of past income, income and cash flow.
What can we say about Aeris Environmental’s ROCE trend?
We are delighted to see that Aeris Environmental is reaping the rewards of its investments and is now generating pre-tax profits. Shareholders would no doubt be delighted because the company was in deficit five years ago but now generates 6.6% of its capital. On top of that, Aeris Environmental employs 184% more capital than before, which is expected of a company trying to gain profitability. This can tell us that the company has many reinvestment opportunities that are able to generate higher returns.
The essentials on Aeris Environmental’s ROCE
Overall, Aeris Environmental gets a big tick from us thanks in large part to the fact that it is now profitable and is reinvesting in its business. Savvy investors may have an opportunity here because the stock has fallen 61% over the past five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we found 3 warning signs for Aeris Environmental (1 should not be ignored) you should be aware of this.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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