Investors Could Be Concerned With Alquiber Quality's (BME:ALQ) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Alquiber Quality (BME:ALQ), it didn't seem to tick all of these boxes.

What Is 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 Alquiber Quality, this is the formula:

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

0.092 = €9.2m ÷ (€169m - €68m) (Based on the trailing twelve months to December 2021).

So, Alquiber Quality has an ROCE of 9.2%. In absolute terms, that's a low return, but it's much better than the Transportation industry average of 7.4%.

Check out the opportunities and risks within the XX Transportation industry.

Above you can see how the current ROCE for Alquiber Quality 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 Alquiber Quality here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Alquiber Quality doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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 separate but related note, it's important to know that Alquiber Quality has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Alquiber Quality's ROCE

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. In light of this, the stock has only gained 15% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Alquiber Quality does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While Alquiber Quality 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. 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.