Aeffe (BIT:AEF) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Aeffe (BIT:AEF), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Aeffe is:

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

0.044 = €13m ÷ (€477m - €190m) (Based on the trailing twelve months to June 2022).

Therefore, Aeffe has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.7%.

Our analysis indicates that AEF is potentially undervalued!

Above you can see how the current ROCE for Aeffe compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Aeffe.

What Does the ROCE Trend For Aeffe Tell Us?

On the surface, the trend of ROCE at Aeffe doesn't inspire confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 4.4%. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Aeffe is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 47% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Aeffe does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

While Aeffe 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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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.