What Aena S.M.E's (BME:AENA) Returns On Capital Can Tell Us

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Aena S.M.E (BME:AENA), we weren't too hopeful.

Understanding 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 Aena S.M.E, this is the formula:

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

0.031 = €427m ÷ (€16b - €2.3b) (Based on the trailing twelve months to September 2020).

Therefore, Aena S.M.E has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 6.7%.

View our latest analysis for Aena S.M.E

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?

We are a bit worried about the trend of returns on capital at Aena S.M.E. To be more specific, the ROCE was 7.7% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Aena S.M.E becoming one if things continue as they have.

Our Take On 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. However the stock has delivered a 56% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 4 warning signs with Aena S.M.E (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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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