If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Grounds Real Estate Development (ETR:AMMN) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Grounds Real Estate Development is:
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).
Thus, Grounds Real Estate Development has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Consumer Durables industry average of 7.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Grounds Real Estate Development's ROCE against it's prior returns. 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 Can We Tell From Grounds Real Estate Development's ROCE Trend?
Over the past two years, Grounds Real Estate Development's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Grounds Real Estate Development to be a multi-bagger going forward.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.
Our Take On Grounds Real Estate Development's ROCE
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 45% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Grounds Real Estate Development does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.
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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