There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Atomos (ASX:AMS) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Atomos, this is the formula:

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

0.06 = AU$4.1m ÷ (AU$91m - AU$23m) (Based on the trailing twelve months to June 2021).

Therefore, Atomos has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 24%.

See our latest analysis for Atomos  roce

In the above chart we have measured Atomos' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

What Can We Tell From Atomos' ROCE Trend?

Atomos has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 6.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Atomos is utilizing 302% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

To the delight of most shareholders, Atomos has now broken into profitability. Considering the stock has delivered 20% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.



If you want to continue researching Atomos, you might be interested to know about the 1 warning signthat our analysis has discovered.

While Atomos isn't earning the highest return, check out this freelist of companies that are earning high returns on equity with solid balance sheets.

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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.