Returns Are Gaining Momentum At ABO-Group Environment (EBR:ABO)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at ABO-Group Environment (EBR:ABO) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for ABO-Group Environment:

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

0.10 = €3.0m ÷ (€57m - €28m) (Based on the trailing twelve months to December 2020).

Therefore, ABO-Group Environment has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.5%.

See our latest analysis for ABO-Group Environment

Historical performance is a great place to start when researching a stock so above you can see the gauge for ABO-Group Environment's ROCE against it's prior returns. If you're interested in investigating ABO-Group Environment's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For ABO-Group Environment Tell Us?

ABO-Group Environment is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 92%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, ABO-Group Environment has a high ratio of current liabilities to total assets of 49%. 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.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what ABO-Group Environment has. Since the stock has returned a staggering 119% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, ABO-Group Environment does come with some risks, and we've found 3 warning signs that you should be aware of.

While ABO-Group Environment 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.

If you decide to trade ABO-Group Environment, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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