There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at ACEA (BIT:ACE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ACEA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = €478m ÷ (€12b - €3.0b) (Based on the trailing twelve months to March 2023).
So, ACEA has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.6%.
See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for ACEA
- Debt is well covered by earnings.
- Dividend is in the top 25% of dividend payers in the market.
- Earnings declined over the past year.
- Annual earnings are forecast to grow for the next 3 years.
- Good value based on P/E ratio compared to estimated Fair P/E ratio.
- Debt is not well covered by operating cash flow.
- Paying a dividend but company has no free cash flows.
- Annual earnings are forecast to grow slower than the Italian market.
So How Is ACEA's ROCE Trending?
The returns on capital haven't changed much for ACEA in recent years. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 5.3%. 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.
The Bottom Line
In conclusion, ACEA has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing: We've identified 3 warning signs with ACEA (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About BIT:ACE
Solid track record, good value and pays a dividend.
