Returns On Capital Are Showing Encouraging Signs At Azelis Group (EBR:AZE)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Azelis Group (EBR:AZE) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Azelis Group is:

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

0.089 = €409m ÷ (€5.7b - €1.1b) (Based on the trailing twelve months to June 2023).

Therefore, Azelis Group has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 15%.

See our latest analysis for Azelis Group

In the above chart we have measured Azelis Group's 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 Azelis Group here for free.

What The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last four years to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 91% more capital is being employed now too. So we're very much inspired by what we're seeing at Azelis Group thanks to its ability to profitably reinvest capital.

Our Take On Azelis Group's ROCE

All in all, it's terrific to see that Azelis Group is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 18% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Azelis Group, we've discovered 1 warning sign that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.