Returns On Capital At Ackermans & Van Haaren (EBR:ACKB) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ackermans & Van Haaren (EBR:ACKB) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Ackermans & Van Haaren, this is the formula:

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

0.035 = €293m ÷ (€18b - €9.5b) (Based on the trailing twelve months to June 2022).

Thus, Ackermans & Van Haaren has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.0%.

Check out our latest analysis for Ackermans & Van Haaren

Above you can see how the current ROCE for Ackermans & Van Haaren compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ackermans & Van Haaren here for free.

So How Is Ackermans & Van Haaren's ROCE Trending?

When we looked at the ROCE trend at Ackermans & Van Haaren, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.5% from 5.3% five years ago. 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.

On a side note, Ackermans & Van Haaren's current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Ackermans & Van Haaren's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ackermans & Van Haaren is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 16% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you'd like to know more about Ackermans & Van Haaren, we've spotted 2 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.