Atlas Pearls (ASX:ATP) Is Investing Its Capital With Increasing Efficiency

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Atlas Pearls (ASX:ATP) looks great, so lets see what the trend can tell us.

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 Atlas Pearls is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.35 = AU$8.5m ÷ (AU$31m – AU$7.3m) (Based on the trailing twelve months to December 2021).

Therefore, Atlas Pearls has an ROCE of 35%. In absolute terms that’s a great return and it’s even better than the Luxury industry average of 11%.

View our latest analysis for Atlas Pearls

roce

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’d like to look at how Atlas Pearls has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Atlas Pearls’ ROCE Trend?

Atlas Pearls has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 436% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, Atlas Pearls is collecting higher returns from the same amount of capital, and that’s impressive. Since the stock has returned a solid 83% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Atlas Pearls does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant…

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.