Returns On Capital At Grounds Real Estate Development (ETR:AMMN) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Grounds Real Estate Development (ETR:AMMN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Grounds Real Estate Development:

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

0.097 = €1.6m ÷ (€32m - €16m) (Based on the trailing twelve months to December 2019).

Therefore, Grounds Real Estate Development has an ROCE of 9.7%. On its own, that's a low figure but it's around the 8.5% average generated by the Consumer Durables industry.

See our latest analysis for Grounds Real Estate Development

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Grounds Real Estate Development has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Grounds Real Estate Development Tell Us?

Things have been pretty stable at Grounds Real Estate Development, with its capital employed and returns on that capital staying somewhat the same for the last two years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Grounds Real Estate Development doesn't end up being a multi-bagger in a few years time.

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 two years. This is intriguing because if current liabilities hadn't increased to 50% of total assets, this reported ROCE would probably be less than9.7% because total capital employed would be higher.The 9.7% ROCE could be even lower if current liabilities weren't 50% 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.

In Conclusion...

In a nutshell, Grounds Real Estate Development has been trudging along with the same returns from the same amount of capital over the last two years. Although the market must be expecting these trends to improve because the stock has gained 32% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Grounds Real Estate Development does come with some risks though, we found 6 warning signs in our investment analysis, and 2 of those are concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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