There Are Reasons To Feel Uneasy About Alten's (EPA:ATE) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating Alten (EPA:ATE), we don't think it's current trends fit the mold of a multi-bagger.

What is 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 Alten:

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

0.093 = €134m ÷ (€2.2b - €708m) (Based on the trailing twelve months to December 2020).

Thus, Alten has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the IT industry average of 9.8%.

View our latest analysis for Alten

In the above chart we have measured Alten's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Alten here for free.

What Can We Tell From Alten's ROCE Trend?

When we looked at the ROCE trend at Alten, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

We're a bit apprehensive about Alten because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 127% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Alten, we've discovered 1 warning sign that you should be aware of.

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