Avemio (ETR:3D6) Hasn't Managed To Accelerate Its Returns

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Avemio (ETR:3D6), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Avemio, this is the formula:

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

-0.098 = -€2.6m ÷ (€51m - €24m) (Based on the trailing twelve months to December 2023).

Therefore, Avemio has an ROCE of -9.8%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 14%.

See our latest analysis for Avemio

In the above chart we have measured Avemio's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Avemio for free.

How Are Returns Trending?

In terms of Avemio's historical ROCE trend, it doesn't exactly demand attention. The company has employed 9,228% more capital in the last five years, and the returns on that capital have remained stable at -9.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than-9.8% because total capital employed would be higher.The -9.8% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On Avemio's ROCE

In summary, Avemio has simply been reinvesting capital and generating the same low rate of return as before. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 88% over the last year. Therefore based on the analysis done in this article, we don't think Avemio has the makings of a multi-bagger.

One more thing, we've spotted 3 warning signs facing Avemio that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com