Investors Could Be Concerned With Alpha Financial Markets Consulting's (LON:AFM) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don't think Alpha Financial Markets Consulting (LON:AFM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Alpha Financial Markets Consulting is:

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

0.13 = UK£14m ÷ (UK£144m - UK£36m) (Based on the trailing twelve months to September 2020).

Thus, Alpha Financial Markets Consulting has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Professional Services industry.

See our latest analysis for Alpha Financial Markets Consulting

In the above chart we have measured Alpha Financial Markets Consulting's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alpha Financial Markets Consulting.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Alpha Financial Markets Consulting doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

While returns have fallen for Alpha Financial Markets Consulting in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 72% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing to note, we've identified 3 warning signs with Alpha Financial Markets Consulting and understanding them should be part of your investment process.

While Alpha Financial Markets Consulting may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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