If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at AB Dynamics (LON:ABDP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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)

0.048 = UK£6.0m ÷ (UK£171m - UK£45m) (Based on the trailing twelve months to February 2023).

Thus, AB Dynamics has an ROCE of 4.8%.  In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.7%.

View our latest analysis for AB Dynamics  roce

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 to see what analysts are forecasting going forward, you should check out our freereport for AB Dynamics.

So How Is AB Dynamics' ROCE Trending?

On the surface, the trend of ROCE at AB Dynamics doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

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. Furthermore the stock has climbed 49% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.



One more thing to note, we've identified  1 warning sign  with AB Dynamics and understanding it should be part of your investment process.

While AB Dynamics 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 freelist here.

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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.