If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Aluflexpack (VTX:AFP) looks quite promising in regards to its trends of return on capital.
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 Aluflexpack:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = €13m ÷ (€276m - €63m) (Based on the trailing twelve months to June 2020).
Thus, Aluflexpack has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.
View our latest analysis for Aluflexpack
Above you can see how the current ROCE for Aluflexpack 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 Aluflexpack.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that Aluflexpack has broken into profitability. The company was generating losses one year ago, but has managed to turn it around and as we saw earlier is now earning 6.1%, which is always encouraging. While returns have increased, the amount of capital employed by Aluflexpack has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
One more thing to note, Aluflexpack has decreased current liabilities to 23% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.The Bottom Line
To bring it all together, Aluflexpack has done well to increase the returns it's generating from its capital employed. And with a respectable 42% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Aluflexpack can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for Aluflexpack that we think you should be aware of.
While Aluflexpack isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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About SWX:AFP
Good value with reasonable growth potential.
