Altri SGPS (ELI:ALTR) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Altri SGPS (ELI:ALTR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Altri SGPS:

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

0.045 = €51m ÷ (€1.5b - €331m) (Based on the trailing twelve months to March 2021).

Thus, Altri SGPS has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.9%.

View our latest analysis for Altri SGPS

In the above chart we have measured Altri SGPS' 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 Altri SGPS here for free.

What Does the ROCE Trend For Altri SGPS Tell Us?

On the surface, the trend of ROCE at Altri SGPS doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 4.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Altri SGPS because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 155% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Altri SGPS, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Altri SGPS 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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