Autostrade Meridionali (BIT:AUTME) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after investigating Autostrade Meridionali (BIT:AUTME), 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. To calculate this metric for Autostrade Meridionali, this is the formula:

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

0.056 = €11m ÷ (€482m - €285m) (Based on the trailing twelve months to December 2020).

Therefore, Autostrade Meridionali has an ROCE of 5.6%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.

See our latest analysis for Autostrade Meridionali

Historical performance is a great place to start when researching a stock so above you can see the gauge for Autostrade Meridionali's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Autostrade Meridionali, check out these free graphs here.

What Can We Tell From Autostrade Meridionali's ROCE Trend?

When we looked at the ROCE trend at Autostrade Meridionali, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Autostrade Meridionali's current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

We're a bit apprehensive about Autostrade Meridionali because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 71% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 4 warning signs for Autostrade Meridionali (2 can't be ignored) 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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