Investors Could Be Concerned With ADA Société Anonyme's (EPA:ALADA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at ADA Société Anonyme (EPA:ALADA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ADA Société Anonyme, this is the formula:

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

0.017 = €611k ÷ (€103m - €66m) (Based on the trailing twelve months to December 2020).

So, ADA Société Anonyme has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 5.8%.

View our latest analysis for ADA Société Anonyme

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

What Can We Tell From ADA Société Anonyme's ROCE Trend?

On the surface, the trend of ROCE at ADA Société Anonyme doesn't inspire confidence. To be more specific, ROCE has fallen from 9.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 64%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for ADA Société Anonyme have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 55% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about ADA Société Anonyme, we've spotted 5 warning signs, and 3 of them are significant.

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.

When trading ADA Société Anonyme or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.