We Like These Underlying Return On Capital Trends At Alumexx (AMS:ALX)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Alumexx's (AMS:ALX) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Alumexx is:

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

0.064 = €2.0m ÷ (€41m - €9.9m) (Based on the trailing twelve months to December 2023).

Thus, Alumexx has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Building industry average of 11%.

See our latest analysis for Alumexx

Historical performance is a great place to start when researching a stock so above you can see the gauge for Alumexx's ROCE against it's prior returns. If you're interested in investigating Alumexx's past further, check out this free graph covering Alumexx's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Alumexx has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Alumexx is utilizing 4,798% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 24%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Alumexx's ROCE

Overall, Alumexx gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Alumexx you'll probably want to know about.

While Alumexx 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.