ALTEO Energy Services (BUSE:ALTEO) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 ALTEO Energy Services (BUSE:ALTEO), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on ALTEO Energy Services is:

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

0.13 = Ft4.8b ÷ (Ft49b - Ft11b) (Based on the trailing twelve months to June 2021).

Therefore, ALTEO Energy Services has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 7.0% it's much better.

See our latest analysis for ALTEO Energy Services

In the above chart we have measured ALTEO Energy Services' 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 ALTEO Energy Services here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at ALTEO Energy Services doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 23% five years ago. 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.

Our Take On ALTEO Energy Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ALTEO Energy Services. And the stock has done incredibly well with a 366% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, ALTEO Energy Services does come with some risks, and we've found 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.