Altia Consultores (BME:ALC) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Altia Consultores (BME:ALC), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Altia Consultores, this is the formula:

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

0.17 = €9.1m ÷ (€82m - €29m) (Based on the trailing twelve months to December 2020).

Thus, Altia Consultores has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.

See our latest analysis for Altia Consultores

Historical performance is a great place to start when researching a stock so above you can see the gauge for Altia Consultores' ROCE against it's prior returns. If you're interested in investigating Altia Consultores' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Altia Consultores Tell Us?

When we looked at the ROCE trend at Altia Consultores, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 34% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Altia Consultores' ROCE

While returns have fallen for Altia Consultores in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 54% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Altia Consultores, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Altia Consultores 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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