Alta Equipment Group (NYSE:ALTG) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Alta Equipment Group (NYSE:ALTG), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Alta Equipment Group is:

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

0.039 = US$22m ÷ (US$1.0b - US$471m) (Based on the trailing twelve months to March 2022).

Thus, Alta Equipment Group has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.

Check out our latest analysis for Alta Equipment Group

Above you can see how the current ROCE for Alta Equipment Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alta Equipment Group.

How Are Returns Trending?

When we looked at the ROCE trend at Alta Equipment Group, we didn't gain much confidence. Around four years ago the returns on capital were 17%, but since then they've fallen to 3.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Alta Equipment Group has done well to pay down its current liabilities to 46% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Alta Equipment Group is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 3.2% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Like most companies, Alta Equipment Group does come with some risks, and we've found 3 warning signs that you should be aware of.

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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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.