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

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Autostrade Meridionali (BIT:AUTME), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Autostrade Meridionali is:

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

0.053 = €2.8m ÷ (€62m - €9.0m) (Based on the trailing twelve months to September 2023).

Thus, Autostrade Meridionali has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 8.4%.

See our latest analysis for Autostrade Meridionali

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Autostrade Meridionali's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE at Autostrade Meridionali is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 5.3% we see today. On top of that, the business is utilizing 70% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a related note, Autostrade Meridionali has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Autostrade Meridionali's ROCE

In summary, it's unfortunate that Autostrade Meridionali is shrinking its capital base and also generating lower returns. Yet despite these poor fundamentals, the stock has gained a huge 422% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Autostrade Meridionali we've found 5 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Autostrade Meridionali 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.