Stock Analysis

Some Investors May Be Worried About ACEA's (BIT:ACE) Returns On Capital

BIT:ACE
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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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating ACEA (BIT:ACE), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for ACEA:

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

0.053 = €424m ÷ (€11b - €2.5b) (Based on the trailing twelve months to March 2021).

Therefore, ACEA has an ROCE of 5.3%. Even though it's in line with the industry average of 5.3%, it's still a low return by itself.

View our latest analysis for ACEA

roce
BIT:ACE Return on Capital Employed July 21st 2021

In the above chart we have measured ACEA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ACEA here for free.

How Are Returns Trending?

In terms of ACEA's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.3% from 7.2% five years ago. However it looks like ACEA might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From ACEA's ROCE

In summary, ACEA is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 113% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

ACEA does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While ACEA 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. 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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