Here's What To Make Of ADLPartner's (EPA:ALP) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at ADLPartner (EPA:ALP), it does have a high ROCE right now, but lets see how returns are trending.

Understanding 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. Analysts use this formula to calculate it for ADLPartner:

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

0.24 = €11m ÷ (€113m - €66m) (Based on the trailing twelve months to June 2020).

Therefore, ADLPartner has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Media industry average of 9.9%.

View our latest analysis for ADLPartner

Historical performance is a great place to start when researching a stock so above you can see the gauge for ADLPartner's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ADLPartner, check out these free graphs here.

What Can We Tell From ADLPartner's ROCE Trend?

On the surface, the trend of ROCE at ADLPartner doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 30%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, ADLPartner's current liabilities are still rather high at 59% of total assets. 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 ADLPartner's ROCE

To conclude, we've found that ADLPartner is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 2 warning signs for ADLPartner that we think you should be aware of.

ADLPartner is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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