Should We Be Excited About The Trends Of Returns At Alquiber Quality (BME:ALQ)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Alquiber Quality (BME:ALQ) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Alquiber Quality:

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%. On its own that's a low return, but compared to the average of 6.9% generated by the Transportation industry, it's much better.

View 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Alquiber Quality, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 13% five years ago. 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.

Another thing to note, Alquiber Quality has a high ratio of current liabilities to total assets of 41%. 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.

The Bottom Line

While returns have fallen for Alquiber Quality in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 14% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Alquiber Quality (including 2 which is shouldn't be ignored) .

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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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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