Be Wary Of Aquafil (BIT:ECNL) And Its Returns On Capital

Published
May 20, 2022
BIT:ECNL
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Aquafil (BIT:ECNL) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Aquafil:

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

0.072 = €34m ÷ (€699m - €230m) (Based on the trailing twelve months to March 2022).

Therefore, Aquafil has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.3%.

View our latest analysis for Aquafil

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BIT:ECNL Return on Capital Employed May 20th 2022

Above you can see how the current ROCE for Aquafil 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 Aquafil.

So How Is Aquafil's ROCE Trending?

In terms of Aquafil's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.2% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Aquafil's 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 Aquafil. However, despite the promising trends, the stock has fallen 16% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 3 warning signs we've spotted with Aquafil (including 1 which makes us a bit uncomfortable) .

While Aquafil may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Aquafil is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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