There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at ATS Automation Tooling Systems (TSE:ATA), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for ATS Automation Tooling Systems:

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

0.079 = CA$110m ÷ (CA$1.9b - CA$518m) (Based on the trailing twelve months to December 2020).

Thus, ATS Automation Tooling Systems has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.3% average generated by the Machinery industry.

Check out our latest analysis for ATS Automation Tooling Systems

In the above chart we have measured ATS Automation Tooling Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ATS Automation Tooling Systems here for free.

So How Is ATS Automation Tooling Systems' ROCE Trending?

The returns on capital haven't changed much for ATS Automation Tooling Systems in recent years. Over the past five years, ROCE has remained relatively flat at around 7.9% and the business has deployed 31% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, ATS Automation Tooling Systems has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 156% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in ATS Automation Tooling Systems it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While ATS Automation Tooling Systems 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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