Here's What's Concerning About Amadeus FiRe's (ETR:AAD) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Amadeus FiRe (ETR:AAD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Amadeus FiRe:

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

0.12 = €31m ÷ (€348m - €91m) (Based on the trailing twelve months to December 2020).

So, Amadeus FiRe has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 11%.

View our latest analysis for Amadeus FiRe

In the above chart we have measured Amadeus FiRe'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 Amadeus FiRe.

So How Is Amadeus FiRe's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 57% five years ago, while the business's capital employed increased by 408%. That being said, Amadeus FiRe raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Amadeus FiRe probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Amadeus FiRe's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Amadeus FiRe. And long term investors must be optimistic going forward because the stock has returned a huge 140% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Amadeus FiRe, we've discovered 4 warning signs that you should be aware of.

While Amadeus FiRe 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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