Should You Be Impressed By ABO Wind's (HMSE:AB9) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at ABO Wind (HMSE:AB9) 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 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 ABO Wind, this is the formula:

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

0.12 = €24m ÷ (€249m - €56m) (Based on the trailing twelve months to December 2020).

Thus, ABO Wind has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 3.6% it's much better.

View our latest analysis for ABO Wind

Above you can see how the current ROCE for ABO Wind compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ABO Wind here for free.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 24% five years ago, while the business's capital employed increased by 119%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with ABO Wind's earnings and if they change as a result from the capital raise.

The Bottom Line On ABO Wind's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for ABO Wind have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 303% over the last three years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for ABO Wind that we think you should be aware of.

While ABO Wind 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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