Aplicaciones y Tratamiento de Sistemas (BME:ATSI) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after investigating Aplicaciones y Tratamiento de Sistemas (BME:ATSI), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Aplicaciones y Tratamiento de Sistemas, this is the formula:

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

0.14 = €7.5m ÷ (€91m - €36m) (Based on the trailing twelve months to June 2024).

Therefore, Aplicaciones y Tratamiento de Sistemas has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the IT industry.

View our latest analysis for Aplicaciones y Tratamiento de Sistemas

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Aplicaciones y Tratamiento de Sistemas has performed in the past in other metrics, you can view this free graph of Aplicaciones y Tratamiento de Sistemas' past earnings, revenue and cash flow.

What Can We Tell From Aplicaciones y Tratamiento de Sistemas' ROCE Trend?

On the surface, the trend of ROCE at Aplicaciones y Tratamiento de Sistemas doesn't inspire confidence. Around four years ago the returns on capital were 24%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Aplicaciones y Tratamiento de Sistemas has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Aplicaciones y Tratamiento de Sistemas' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Aplicaciones y Tratamiento de Sistemas is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Aplicaciones y Tratamiento de Sistemas does have some risks though, and we've spotted 1 warning sign for Aplicaciones y Tratamiento de Sistemas that you might be interested in.

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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.