Is Albioma (EPA:ABIO) Likely To Turn Things Around?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Albioma (EPA:ABIO), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Albioma:

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

0.081 = €115m ÷ (€1.7b - €316m) (Based on the trailing twelve months to June 2020).

So, Albioma has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.2%.

Check out our latest analysis for Albioma

Above you can see how the current ROCE for Albioma compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Albioma here for free.

The Trend Of ROCE

The returns on capital haven't changed much for Albioma in recent years. Over the past five years, ROCE has remained relatively flat at around 8.1% and the business has deployed 44% more capital into its operations. 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.

What We Can Learn From Albioma's ROCE

In conclusion, Albioma has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 301% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Albioma, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Albioma isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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