Alsea. de (BMV:ALSEA) May Have Issues Allocating Its Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Alsea. de (BMV:ALSEA) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Alsea. de:

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

0.069 = Mex$4.1b ÷ (Mex$83b - Mex$23b) (Based on the trailing twelve months to December 2021).

So, Alsea. de has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 4.6%.

View our latest analysis for Alsea. de

In the above chart we have measured Alsea. de'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 Alsea. de here for free.

So How Is Alsea. de's ROCE Trending?

On the surface, the trend of ROCE at Alsea. de doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 9.4% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Alsea. de's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Alsea. de. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Alsea. de, we've discovered 1 warning sign that you should be aware of.

While Alsea. de 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.