ACS Actividades de Construcción y Servicios (BME:ACS) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at ACS Actividades de Construcción y Servicios (BME:ACS), it didn't seem to tick all of these boxes.

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. 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)

0.04 = €821m ÷ (€27b - €6.9b) (Based on the trailing twelve months to September 2024).

So, ACS Actividades de Construcción y Servicios has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.1%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for ACS Actividades de Construcción y Servicios .

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 27%. Usually this isn't ideal, but given ACS Actividades de Construcción y Servicios conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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 side note, ACS Actividades de Construcción y Servicios has done well to pay down its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

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. And the stock has done incredibly well with a 155% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 2 warning signs with ACS Actividades de Construcción y Servicios (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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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.