Investors have encountered slowing capital returns at Ainsworth Game Technology (ASX:AGI)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Although, when we looked Ainsworth gaming technology (ASX: AGI), it didn’t seem to tick all those boxes.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for Ainsworth Game Technology, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = AU$36 million ÷ (AU$381 million – AU$49 million) (Based on the last twelve months to December 2021).
So, Ainsworth Game Technology posted a ROCE of 11%. In absolute terms, this is a fairly normal return, and somewhat close to the hotel industry average of 9.1%.
Above, you can see how Ainsworth Game Technology’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want, you can check out analyst forecasts covering Ainsworth Game Technology here for free.
What is the return trend?
Things have been fairly stable at Ainsworth Game Technology, with its capital employed and returns on that capital remaining roughly the same over the past five years. Companies with these characteristics tend to be mature and stable operations, as they are past the growth phase. So unless we see a substantial change at Ainsworth Game Technology in terms of ROCE and additional investment, we wouldn’t hold our breath that it’s a multi-bagger. This probably explains why Ainsworth Game Technology pays out 46% of its income to shareholders in the form of dividends. Unless companies have very attractive growth opportunities, they will usually return money to shareholders.
We can conclude that when it comes to Ainsworth Game Technology’s Returns on Capital Employed and trends, there is not much change to report. And investors seem hesitant about the trend picking up, as the stock has fallen 42% in the past five years. Therefore, based on the analysis carried out in this article, we do not believe that Ainsworth Game Technology has what it takes to be a multi-bagger.
One more thing we spotted 1 warning sign against Ainsworth Game Technology that you might find interesting.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.