If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating AlzChem Group (ETR:ACT), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for AlzChem Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = €31m ÷ (€435m - €108m) (Based on the trailing twelve months to March 2023).
So, AlzChem Group has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Chemicals industry average of 10%.
Check out our latest analysis for AlzChem Group
Above you can see how the current ROCE for AlzChem Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From AlzChem Group's ROCE Trend?
When we looked at the ROCE trend at AlzChem Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 16% five years ago. 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.
The Bottom Line On AlzChem Group's ROCE
While returns have fallen for AlzChem Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 29% 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.
One final note, you should learn about the 2 warning signs we've spotted with AlzChem Group (including 1 which is a bit concerning) .