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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? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Aalberts' (AMS:AALB) ROCE trend, we were pretty happy with what we saw.
Understanding 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. The formula for this calculation on Aalberts is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €410m ÷ (€4.2b - €996m) (Based on the trailing twelve months to December 2022).
Thus, Aalberts has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 11%.
See our latest analysis for Aalberts
In the above chart we have measured Aalberts' 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 Aalberts here for free.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 49% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that Aalberts has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Aalberts' ROCE
In the end, Aalberts has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 12% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One more thing to note, we've identified 2 warning signs with Aalberts and understanding them should be part of your investment process.
While Aalberts isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.