ALBA (FRA:ABA) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at ALBA (FRA:ABA), so let's see why.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ALBA is:

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

0.0038 = €606k ÷ (€200m - €39m) (Based on the trailing twelve months to December 2023).

So, ALBA has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 11%.

Check out our latest analysis for ALBA

Historical performance is a great place to start when researching a stock so above you can see the gauge for ALBA's ROCE against it's prior returns. If you'd like to look at how ALBA has performed in the past in other metrics, you can view this free graph of ALBA's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of ALBA's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 2.1% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ALBA becoming one if things continue as they have.

Our Take On ALBA's ROCE

In summary, it's unfortunate that ALBA is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 88% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about ALBA, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

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.

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.