ACS Actividades de Construcción y Servicios (BME:ACS) Might Be Having Difficulty Using Its Capital Effectively
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at ACS Actividades de Construcción y Servicios (BME:ACS), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for ACS Actividades de Construcción y Servicios:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = €285m ÷ (€38b - €20b) (Based on the trailing twelve months to December 2022).
Therefore, ACS Actividades de Construcción y Servicios has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.1%.
View our latest analysis for ACS Actividades de Construcción y Servicios
Above you can see how the current ROCE for ACS Actividades de Construcción y Servicios compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ACS Actividades de Construcción y Servicios.
What Does the ROCE Trend For ACS Actividades de Construcción y Servicios Tell Us?
In terms of ACS Actividades de Construcción y Servicios' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a separate but related note, it's important to know that ACS Actividades de Construcción y Servicios has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Our Take On ACS Actividades de Construcción y Servicios' 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 ACS Actividades de Construcción y Servicios. These trends are starting to be recognized by investors since the stock has delivered a 13% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you'd like to know about the risks facing ACS Actividades de Construcción y Servicios, we've discovered 1 warning sign that you should be aware of.
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.
Valuation is complex, but we're helping make it simple.
Find out whether ACS Actividades de Construcción y Servicios is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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.
ACS Actividades de Construcción y Servicios
ACS, Actividades de Construcción y Servicios, S.A.
Fair value with mediocre balance sheet.