We Like These Underlying Return On Capital Trends At AVADA Group (ASX:AVD)

As investors, we're always on the lookout for companies that demonstrate strong underlying trends, particularly when it comes to their return on capital employed (ROCE). AVADA Group (ASX:AVD), a provider of traffic management and ancillary services in Australia and New Zealand, has caught our eye with its improving ROCE and reinvestment strategy. Let's dive into the details and explore what makes AVADA Group an attractive investment opportunity.

Improving ROCE and Reinvestment Strategy

AVADA Group's ROCE has been on an upward trajectory, reaching 6.0% in the most recent fiscal year. This improvement can be attributed to the company's increasing profitability and efficient use of capital. AVADA Group has become profitable in the past year, with earnings growth of 15.57% year-over-year. This improved profitability has led to a higher return on capital employed.

The company's reinvestment strategy has also played a significant role in its ROCE improvement. AVADA Group has been reinvesting profits at increasing rates of return, as evidenced by the growing amount of capital employed. The company's capital employed has grown by 48% from FY 2023 to FY 2024, indicating that it is investing in growth opportunities.



Revenue Growth and Market Expansion

AVADA Group's revenue growth rate has been impressive, averaging 21.5% per year. This growth in revenue is a result of the company's reinvestment strategy, as it has been expanding its operations and increasing its market share. AVADA Group has made strategic acquisitions, such as STA Traffic Management and Construct Traffic Pty Ltd, which have helped to expand its market share and increase its revenue.

The company's expansion into new markets, both domestically and internationally, has also contributed to its revenue growth. AVADA Group has been expanding its operations in Australia and New Zealand, which has required additional capital investment to establish new facilities, hire more employees, and cover other related expenses.

Sustainability and Risks

The sustainability of AVADA Group's trends depends on several factors, such as maintaining or improving profitability, managing debt levels effectively, and adapting to changing market conditions. AVADA Group's profit margin is still relatively low at 0.74%, so maintaining or improving profitability will be crucial for sustaining capital employed growth.

AVADA Group's debt-to-equity ratio is 0.88, indicating that the company is not overly reliant on debt financing. However, the debt-to-EBITDA ratio is 2.75, which is relatively high. The company must manage its debt levels effectively to ensure the sustainability of its capital employed growth.



Conclusion

AVADA Group's improving ROCE, reinvestment strategy, revenue growth, and market expansion make it an attractive investment opportunity. However, investors must remain vigilant and monitor the company's profitability, debt levels, and adaptability to changing market conditions. By staying informed and maintaining a long-term perspective, investors can capitalize on AVADA Group's underlying trends and potential for growth.