Stock Analysis

Aena S.M.E (BME:AENA) Will Be Looking To Turn Around Its Returns

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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Aena S.M.E (BME:AENA) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Aena S.M.E is:

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

0.086 = €1.2b ÷ (€16b - €1.5b) (Based on the trailing twelve months to December 2022).

Thus, Aena S.M.E has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Infrastructure industry average of 8.5%.

Check out our latest analysis for Aena S.M.E

BME:AENA Return on Capital Employed March 15th 2023

Above you can see how the current ROCE for Aena S.M.E compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Aena S.M.E here for free.

How Are Returns Trending?

There is reason to be cautious about Aena S.M.E, given the returns are trending downwards. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Aena S.M.E to turn into a multi-bagger.

What We Can Learn From Aena S.M.E's ROCE

In summary, it's unfortunate that Aena S.M.E is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Aena S.M.E, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Aena S.M.E 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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