There Are Reasons To Feel Uneasy About ACS Actividades de Construcción y Servicios' (BME:ACS) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at ACS Actividades de Construcción y Servicios (BME:ACS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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)

0.034 = €587m ÷ (€37b - €19b) (Based on the trailing twelve months to June 2023).

So, ACS Actividades de Construcción y Servicios has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.2%.

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 to see what analysts are forecasting going forward, you should check out our free report for ACS Actividades de Construcción y Servicios.

The Trend Of ROCE

When we looked at the ROCE trend at ACS Actividades de Construcción y Servicios, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 3.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, ACS Actividades de Construcción y Servicios has done well to pay down its current liabilities to 53% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On ACS Actividades de Construcción y Servicios' ROCE

While returns have fallen for ACS Actividades de Construcción y Servicios in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 35% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

ACS Actividades de Construcción y Servicios does have some risks though, and we've spotted 2 warning signs for ACS Actividades de Construcción y Servicios that you might be interested in.

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.