Capital returns are remarkable for ALPHA ADRIATIC dd (ZGSE:ULPL)

There are a few key trends to look out for if we want to identify the next multi-bagger. First, we would like to identify a growth come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we looked at the ROCE trend of ALPHA ADRIATIC dd (ZGSE:ULPL) we really liked what we saw.

Understanding return on capital employed (ROCE)

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for ALPHA ADRIATIC dd, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.23 = Kn77m ÷ (Kn502m – Kn173m) (Based on the last twelve months to June 2022).

Therefore, ALPHA ADRIATIC dd has a ROCE of 23%. That’s a fantastic return and not only that, it tops the 8.8% average earned by companies in a similar industry.

See our latest analysis for ALPHA ADRIATIC dd

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you would like to view ALPHA ADRIATIC dd’s past performance in other metrics, you can view this free chart of past profits, revenue and cash flow.

The ROCE trend

ALPHA ADRIATIC dd did not disappoint in terms of ROCE growth. Figures show that over the past five years, capital returns have increased by 1,928%. The company now earns 0.2 Kn per dollar of capital used. Speaking of capital employed, the company is actually using 68% less than five years ago, which may be a sign of a company improving efficiency. If this trend continues, the company might become more efficient, but it is decreasing in terms of total assets.

By the way, we noticed that the improvement in ROCE seems to be partly fueled by an increase in current liabilities. Current liabilities have increased to 34% of total assets, so the company is now financed more by suppliers or short-term creditors. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.

The Key Takeaway

Ultimately, ALPHA ADRIATIC dd has proven that its capital allocation skills are good with these higher returns with less capital. And since the stock has fallen 22% in the past five years, there could be an opportunity here. That said, research into the company’s current valuation metrics and future prospects seems appropriate.

If you want to know more about ALPHA ADRIATIC dd, we spotted 5 warning signs, and 3 of them are a little worrying.

High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.