Should We Be Excited About The Trends Of Returns At AB Dynamics (LON:ABDP)?
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after briefly looking over the numbers, we don't think AB Dynamics (LON:ABDP) 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)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AB Dynamics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = UK£8.9m ÷ (UK£127m - UK£18m) (Based on the trailing twelve months to February 2020).
Therefore, AB Dynamics has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.8%.
See our latest analysis for AB Dynamics
Above you can see how the current ROCE for AB Dynamics 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 AB Dynamics here for free.
So How Is AB Dynamics' ROCE Trending?
Unfortunately, the trend isn't great with ROCE falling from 26% five years ago, while capital employed has grown 842%. Usually this isn't ideal, but given AB Dynamics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with AB Dynamics' earnings and if they change as a result from the capital raise.
On a side note, AB Dynamics has done well to pay down its current liabilities to 14% 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.
Our Take On AB Dynamics' ROCE
While returns have fallen for AB Dynamics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 729% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to continue researching AB Dynamics, you might be interested to know about the 3 warning signs that our analysis has discovered.
While AB Dynamics isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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