Here's What's Concerning About Mare Nostrum Société anonyme's (EPA:ALMAR) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Mare Nostrum Société anonyme (EPA:ALMAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Mare Nostrum Société anonyme is:

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

0.033 = €1.2m ÷ (€81m - €45m) (Based on the trailing twelve months to December 2021).

So, Mare Nostrum Société anonyme has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 12%.

Our analysis indicates that ALMAR is potentially overvalued!

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Mare Nostrum Société anonyme's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Mare Nostrum Société anonyme's ROCE Trending?

When we looked at the ROCE trend at Mare Nostrum Société anonyme, we didn't gain much confidence. To be more specific, ROCE has fallen from 51% 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 side note, Mare Nostrum Société anonyme has done well to pay down its current liabilities to 56% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Mare Nostrum Société anonyme'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 Mare Nostrum Société anonyme. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Mare Nostrum Société anonyme does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Mare Nostrum Société anonyme 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.