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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Alta Equipment Group (NYSE:ALTG) and its ROCE trend, we weren't exactly thrilled.
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What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Alta Equipment Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = US$19m ÷ (US$1.5b - US$577m) (Based on the trailing twelve months to December 2024).
Thus, Alta Equipment Group has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.
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, you can check out the forecasts from the analysts covering Alta Equipment Group for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Alta Equipment Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 11% five years ago. However it looks like Alta Equipment Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Alta Equipment Group has done well to pay down its current liabilities to 39% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.