Investors Met With Slowing Returns on Capital At ACEA (BIT:ACE)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ACEA (BIT:ACE) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for ACEA:

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

0.061 = €494m ÷ (€11b - €3.3b) (Based on the trailing twelve months to September 2022).

So, ACEA has an ROCE of 6.1%. On its own that's a low return, but compared to the average of 5.0% generated by the Integrated Utilities industry, it's much better.

View our latest analysis for ACEA

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

What Can We Tell From ACEA's ROCE Trend?

There are better returns on capital out there than what we're seeing at ACEA. Over the past five years, ROCE has remained relatively flat at around 6.1% and the business has deployed 65% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On ACEA's ROCE

In summary, ACEA has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 7.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for ACEA (of which 2 don't sit too well with us!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.