Yahoo Finance There Are Reasons To Feel Uneasy About Alphawave IP Group's (LON:AWE) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Alphawave IP Group (LON:AWE), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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 Alphawave IP Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$25m ÷ (US$917m - US$180m) (Based on the trailing twelve months to December 2022).
So, Alphawave IP Group has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 15%.
Check out our latest analysis for Alphawave IP Group
Above you can see how the current ROCE for Alphawave IP Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alphawave IP Group.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Alphawave IP Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 59% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Alphawave IP Group has done well to pay down its current liabilities to 20% of total assets. Since the ratio used to be 80%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.
The Bottom Line On Alphawave IP Group's ROCE
While returns have fallen for Alphawave IP Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 36% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Alphawave IP Group does have some risks though, and we've spotted 4 warning signs for Alphawave IP Group that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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