AIREA's (LON:AIEA) Returns On Capital Are Heading Higher
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at AIREA (LON:AIEA) so let's look a bit deeper.
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. Analysts use this formula to calculate it for AIREA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = UK£888k ÷ (UK£27m - UK£5.3m) (Based on the trailing twelve months to December 2021).
Therefore, AIREA has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.
Check out our latest analysis for AIREA
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of AIREA, check out these free graphs here.
What Can We Tell From AIREA's ROCE Trend?
Shareholders will be relieved that AIREA has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.0%, which is always encouraging. While returns have increased, the amount of capital employed by AIREA has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
What We Can Learn From AIREA's ROCE
As discussed above, AIREA appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.2% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
AIREA does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While AIREA 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.