If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at AudioCodes (NASDAQ:AUDC) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AudioCodes is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$27m ÷ (US$341m – US$87m) (Based on the trailing twelve months to June 2020).
Thus, AudioCodes has an ROCE of 11%. In absolute terms, that’s a satisfactory return, but compared to the Communications industry average of 7.9% it’s much better.
Above you can see how the current ROCE for AudioCodes compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From AudioCodes’ ROCE Trend?
The trends we’ve noticed at AudioCodes are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 71% more capital is being employed now too. So we’re very much inspired by what we’re seeing at AudioCodes thanks to its ability to profitably reinvest capital.
In summary, it’s great to see that AudioCodes can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 839% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we’ve identified 4 warning signs with AudioCodes and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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