There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Australian Agricultural Projects (ASX:AAP) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Australian Agricultural Projects, this is the formula:

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

0.072 = AU$1.4m ÷ (AU$22m - AU$3.5m) (Based on the trailing twelve months to June 2024).

Thus, Australian Agricultural Projects has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

View our latest analysis for Australian Agricultural Projects

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 Australian Agricultural Projects has performed in the past in other metrics, you can view this free graph of Australian Agricultural Projects' past earnings, revenue and cash flow.

So How Is Australian Agricultural Projects' ROCE Trending?

Australian Agricultural Projects has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 7.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Australian Agricultural Projects is utilizing 96% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Australian Agricultural Projects has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Australian Agricultural Projects' ROCE

Long story short, we're delighted to see that Australian Agricultural Projects' reinvestment activities have paid off and the company is now profitable. And a remarkable 310% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Australian Agricultural Projects we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Australian Agricultural Projects 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 free list 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.