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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Almunda Professionals (AMS:AMUND) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Almunda Professionals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = €1.9m ÷ (€37m - €9.8m) (Based on the trailing twelve months to June 2024).
Thus, Almunda Professionals has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.
View our latest analysis for Almunda Professionals
Historical performance is a great place to start when researching a stock so above you can see the gauge for Almunda Professionals' ROCE against it's prior returns. If you're interested in investigating Almunda Professionals' past further, check out this free graph covering Almunda Professionals' past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Almunda Professionals doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.1% from 15% 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.
On a side note, Almunda Professionals has done well to pay down its current liabilities to 26% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Almunda Professionals. In light of this, the stock has only gained 33% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.