What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at A2A (BIT:A2A) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 A2A is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = €1.1b ÷ (€18b - €6.2b) (Based on the trailing twelve months to March 2024).
Therefore, A2A has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 6.4% generated by the Integrated Utilities industry, it's much better.
View our latest analysis for A2A
In the above chart we have measured A2A's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for A2A .
What Does the ROCE Trend For A2A Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 52% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On A2A's ROCE
To sum it up, A2A has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 55% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if A2A can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing A2A we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.
While A2A 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.
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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.
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About BIT:A2A
A2A
Engages in the production, sale, and distribution of gas and electricity, and district heating in Italy and internationally.
Undervalued with solid track record and pays a dividend.
