Should We Be Excited About The Trends Of Returns At Altia Consultores (BME:ALC)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Altia Consultores (BME:ALC), 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 Altia Consultores:

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

0.14 = €6.1m ÷ (€79m - €35m) (Based on the trailing twelve months to June 2020).

Thus, Altia Consultores has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the IT industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Altia Consultores, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Altia Consultores doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 29% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Altia Consultores' current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Altia Consultores is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 106% to shareholders in 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Altia Consultores (of which 1 is concerning!) that you should know about.

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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This article by Simply Wall St is general in nature. 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.
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