What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Allterco AD (BUL:A4L) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Allterco AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = лв18m ÷ (лв76m - лв4.2m) (Based on the trailing twelve months to March 2022).
Thus, Allterco AD has an ROCE of 25%. In absolute terms that's a great return and it's even better than the IT industry average of 13%.
In the above chart we have measured Allterco AD's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Allterco AD.
So How Is Allterco AD's ROCE Trending?
The trends we've noticed at Allterco AD are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 25%. The amount of capital employed has increased too, by 193%. 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 5.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Allterco AD has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
All in all, it's terrific to see that Allterco AD is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,022% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 1 warning sign with Allterco AD and understanding it should be part of your investment process.
Allterco AD is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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