If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Abitare In (BIT:ABT) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Abitare In, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = €8.1m ÷ (€202m - €55m) (Based on the trailing twelve months to September 2020).
Thus, Abitare In has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.7%.
Check out our latest analysis for Abitare In
Above you can see how the current ROCE for Abitare In 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 Abitare In here for free.
How Are Returns Trending?
We're delighted to see that Abitare In is reaping rewards from its investments and is now generating some pre-tax profits. About four years ago the company was generating losses but things have turned around because it's now earning 5.5% on its capital. In addition to that, Abitare In is employing 584% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
In summary, it's great to see that Abitare In has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 50% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Abitare In can keep these trends up, it could have a bright future ahead.
On a final note, we found 2 warning signs for Abitare In (1 doesn't sit too well with us) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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About BIT:ABT
High growth potential with adequate balance sheet.
