Yahoo Finance Capital Allocation Trends At Amadeus FiRe (ETR:AAD) Aren't Ideal
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Amadeus FiRe (ETR:AAD) has a high ROCE right now, lets see what we can decipher from how returns are changing.
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. Analysts use this formula to calculate it for Amadeus FiRe:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = €61m ÷ (€347m - €111m) (Based on the trailing twelve months to March 2024).
Thus, Amadeus FiRe has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 6.5%.
View our latest analysis for Amadeus FiRe
In the above chart we have measured Amadeus FiRe's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Amadeus FiRe .
What The Trend Of ROCE Can Tell Us
In terms of Amadeus FiRe's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 47%, but they have dropped over the last five years. However it looks like Amadeus FiRe 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.
The Key Takeaway
To conclude, we've found that Amadeus FiRe is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 8.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
One more thing to note, we've identified 1 warning sign with Amadeus FiRe and understanding this should be part of your investment process.
Amadeus FiRe is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
