What trends should we look for if we are to identify stocks that can multiply in value over the long term? First, we will want to see a to recover on capital employed (ROCE) which increases and, on the other hand, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So on that note, SLA (ASX: ALQ) looks pretty promising when it comes to its ROI trends.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for SLA, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.14 = A $ 286 million ÷ (A $ 2.5 billion – A $ 378 million) (Based on the last twelve months up to March 2021).
Therefore, The ALS has a ROCE of 14%. On its own, that’s pretty standard performance, but compared to the 20% professional services industry average, it’s not as good.
See our latest analysis for ALS
In the chart above, we’ve measured ALS’s past ROCE versus past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for ALS.
What can we say about the ROCE trend of ALS?
ALS did not disappoint with the growth of its ROCE. Specifically, while the company has kept capital employed relatively stable over the past five years, ROCE has climbed 56% over the same period. Basically, the business generates higher returns from the same amount of capital and this is proof that there are improvements in the efficiency of the business. On this front, things are looking good, so it’s worth exploring what management has said about growth plans for the future.
The bottom line
In summary, we are delighted to see that ALS has been able to increase its efficiency and achieve higher rates of return on the same amount of capital. Given that the stock has returned 149% to shareholders over the past five years, it looks like investors are recognizing these changes. Therefore, we believe it would be worth checking out whether these trends will continue.
There are some risks with ALS, however, and we have identified 1 warning sign for ALS that might interest you.
While ALS does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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