Albioma's (EPA:ABIO) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Albioma (EPA:ABIO) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Albioma:

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

0.078 = €119m ÷ (€1.8b - €226m) (Based on the trailing twelve months to December 2020).

So, Albioma has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 5.2%.

Check out our latest analysis for Albioma

In the above chart we have measured Albioma'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 Albioma here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Albioma. The company has consistently earned 7.8% for the last five years, and the capital employed within the business has risen 52% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Albioma's returns on capital haven't increased but it is reinvesting in the business. Yet to long term shareholders the stock has gifted them an incredible 187% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about Albioma, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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.

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