I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in The Blockchain Group (EPA:ALTBG).
Blockchain Group stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Blockchain Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for ALTBG
Choosing to invest in Blockchain Group comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Blockchain Group’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). Take a look at the formula box beneath:
ROCE Calculation for ALTBG
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €661k ÷ (€3m – €1m) = 31%
As you can see, ALTBG earned €31.1 from every €100 you invested over the previous twelve months. This shows Blockchain Group provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if ALTBG is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.
Does this mean I should invest?
ALTBG is efficient with the use of capital, but this is only the case if ALTBG continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that ALTBG’s ROCE has risen from -40%, indicating the company’s capital returns have stengthened. Over the same period, EBT went from -€6m to €661k and capital employed has deteriorated as a result of a decreased level of total assets , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.
ROCE for ALTBG investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or reverse due to reasons that cannot be seen by looking in the past. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Blockchain Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Valuation: What is ALTBG worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ALTBG is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.