If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Promotora Ambiental. de (BMV:PASAB) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Promotora Ambiental. de is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = Mex$246m ÷ (Mex$6.2b - Mex$2.3b) (Based on the trailing twelve months to September 2020).
Thus, Promotora Ambiental. de has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Promotora Ambiental. de's ROCE against it's prior returns. If you'd like to look at how Promotora Ambiental. de has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Promotora Ambiental. de's ROCE Trending?
Promotora Ambiental. de is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 55% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 37% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Key Takeaway
As discussed above, Promotora Ambiental. de appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 5 warning signs with Promotora Ambiental. de (at least 2 which are a bit concerning) , 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.
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