ACS Actividades de Construcción y Servicios (BME:ACS) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ACS Actividades de Construcción y Servicios (BME:ACS), we don't think it's current trends fit the mold of a multi-bagger.

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 ACS Actividades de Construcción y Servicios is:

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

0.02 = €392m ÷ (€41b - €22b) (Based on the trailing twelve months to June 2024).

Therefore, ACS Actividades de Construcción y Servicios has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.8%.

See 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, you can check out the forecasts from the analysts covering ACS Actividades de Construcción y Servicios for free.

What Can We Tell From ACS Actividades de Construcción y Servicios' ROCE Trend?

We weren't thrilled with the trend because ACS Actividades de Construcción y Servicios' ROCE has reduced by 90% over the last five years, while the business employed 34% more capital. That being said, ACS Actividades de Construcción y Servicios raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence ACS Actividades de Construcción y Servicios might not have received a full period of earnings contribution from it.

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 53%, 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

In summary, ACS Actividades de Construcción y Servicios is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 58% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for ACS Actividades de Construcción y Servicios you'll probably want to know about.

While ACS Actividades de Construcción y Servicios may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.