Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Alquiber Quality (BME:ALQ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Alquiber Quality is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = €6.1m ÷ (€111m - €46m) (Based on the trailing twelve months to December 2019).
Thus, Alquiber Quality has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 6.5%.
Check out our latest analysis for Alquiber Quality
Historical performance is a great place to start when researching a stock so above you can see the gauge for Alquiber Quality's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Alquiber Quality, check out these free graphs here.
The Trend Of ROCE
In terms of Alquiber Quality's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.3%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Alquiber Quality's current liabilities are still rather high at 41% 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.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Alquiber Quality. These trends are starting to be recognized by investors since the stock has delivered a 2.8% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Alquiber Quality (of which 3 are concerning!) that you should know about.
While Alquiber Quality may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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About BME:ALQ
Alquiber Quality
Provides industrial and commercial vehicle rental services for SMEs and large companies in Spain.
Undervalued with high growth potential.
