Amadeus FiRe (ETR:AAD) May Have Issues Allocating Its Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Amadeus FiRe (ETR:AAD), it does have a high ROCE right now, but lets see how returns are trending.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Amadeus FiRe, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = €66m ÷ (€354m - €98m) (Based on the trailing twelve months to March 2023).
So, 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 7.7%.
See 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'd like, you can check out the forecasts from the analysts covering Amadeus FiRe here for free.
What Does the ROCE Trend For Amadeus FiRe Tell Us?
On the surface, the trend of ROCE at Amadeus FiRe doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 54% where it was five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Amadeus FiRe's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we've found 1 warning sign for Amadeus FiRe that we think you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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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