Yahoo Finance Allied Motion Technologies (NASDAQ:AMOT) Might Be Having Difficulty Using Its Capital Effectively
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Allied Motion Technologies (NASDAQ:AMOT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Allied Motion Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.076 = US$23m ÷ (US$360m - US$56m) (Based on the trailing twelve months to March 2021).
Therefore, Allied Motion Technologies has an ROCE of 7.6%. On its own, that's a low figure but it's around the 9.0% average generated by the Electrical industry.
See our latest analysis for Allied Motion Technologies
Above you can see how the current ROCE for Allied Motion Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Allied Motion Technologies here for free.
So How Is Allied Motion Technologies' ROCE Trending?
When we looked at the ROCE trend at Allied Motion Technologies, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.6% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Allied Motion Technologies has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Allied Motion Technologies' ROCE
In summary, Allied Motion Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 119% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we found 2 warning signs for Allied Motion Technologies (1 makes us a bit uncomfortable) you should be aware of.
While Allied Motion Technologies 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.
This article by Simply Wall St is general in nature. 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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