Under The Bonnet, ALPHA ADRIATIC d.d's (ZGSE:ULPL) Returns Look Impressive

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of ALPHA ADRIATIC d.d (ZGSE:ULPL) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on ALPHA ADRIATIC d.d is:

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

0.22 = Kn33m ÷ (Kn297m - Kn145m) (Based on the trailing twelve months to June 2021).

Therefore, ALPHA ADRIATIC d.d has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Infrastructure industry average of 8.3%.

View our latest analysis for ALPHA ADRIATIC d.d

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of ALPHA ADRIATIC d.d, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that ALPHA ADRIATIC d.d is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 22% which is no doubt a relief for some early shareholders. In regards to capital employed, ALPHA ADRIATIC d.d is using 86% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 49% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

In the end, ALPHA ADRIATIC d.d has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 45% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

ALPHA ADRIATIC d.d does come with some risks though, we found 5 warning signs in our investment analysis, and 4 of those are concerning...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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