Allied Tecnologia (BVMF:ALLD3) Hasn't Managed To Accelerate Its Returns

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Allied Tecnologia (BVMF:ALLD3) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Allied Tecnologia:

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

0.092 = R$199m ÷ (R$3.7b - R$1.5b) (Based on the trailing twelve months to March 2023).

So, Allied Tecnologia has an ROCE of 9.2%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.

Check out our latest analysis for Allied Tecnologia

Above you can see how the current ROCE for Allied Tecnologia compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Allied Tecnologia.

SWOT Analysis for Allied Tecnologia

What Does the ROCE Trend For Allied Tecnologia Tell Us?

There are better returns on capital out there than what we're seeing at Allied Tecnologia. Over the past five years, ROCE has remained relatively flat at around 9.2% and the business has deployed 94% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Allied Tecnologia has done well to reduce current liabilities to 41% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

Our Take On Allied Tecnologia's ROCE

As we've seen above, Allied Tecnologia's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 48% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with Allied Tecnologia and understanding these should be part of your investment process.

While Allied Tecnologia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.