What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating As Commercial Industrial Company of Computers and Toys (ATH:ASCO), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. Analysts use this formula to calculate it for As Commercial Industrial Company of Computers and Toys:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = €2.6m ÷ (€36m - €4.3m) (Based on the trailing twelve months to December 2020).
So, As Commercial Industrial Company of Computers and Toys has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 18%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for As Commercial Industrial Company of Computers and Toys' ROCE against it's prior returns. If you'd like to look at how As Commercial Industrial Company of Computers and Toys has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at As Commercial Industrial Company of Computers and Toys, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.9% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.
The Bottom Line
We're a bit apprehensive about As Commercial Industrial Company of Computers and Toys 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 287% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
As Commercial Industrial Company of Computers and Toys does have some risks though, and we've spotted 2 warning signs for As Commercial Industrial Company of Computers and Toys that you might be interested in.
While As Commercial Industrial Company of Computers and Toys 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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