Some Investors May Be Worried About ADENTRA's (TSE:ADEN) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think ADENTRA (TSE:ADEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on ADENTRA is:

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

0.091 = US$101m ÷ (US$1.4b - US$303m) (Based on the trailing twelve months to September 2024).

So, ADENTRA has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

View our latest analysis for ADENTRA

Above you can see how the current ROCE for ADENTRA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ADENTRA for free.

What Can We Tell From ADENTRA's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 310%. Usually this isn't ideal, but given ADENTRA conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with ADENTRA's earnings and if they change as a result from the capital raise.

What We Can Learn From ADENTRA's ROCE

To conclude, we've found that ADENTRA is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 131% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about ADENTRA, we've spotted 3 warning signs, and 1 of them is a bit concerning.

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.

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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.