What Can The Trends At ABO-Group Environment (EBR:ABO) Tell Us About Their Returns?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 when we looked at ABO-Group Environment (EBR:ABO) and its trend of ROCE, we really liked what we saw.

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. 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)

0.11 = €3.1m ÷ (€54m - €27m) (Based on the trailing twelve months to June 2020).

Thus, ABO-Group Environment has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Commercial Services industry average of 10%.

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'd like to look at how ABO-Group Environment has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is ABO-Group Environment's ROCE Trending?

The trends we've noticed at ABO-Group Environment are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 94%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, ABO-Group Environment's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On ABO-Group Environment's ROCE

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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 30% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

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.

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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.
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