Consumer Durables News

Amica (WSE:AMC) Might Be Having Difficulty Using Its Capital Effectively


If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Amica (WSE:AMC), it didn’t seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Amica is:

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

0.046 = zł62m ÷ (zł2.4b – zł1.1b) (Based on the trailing twelve months to June 2022).

Therefore, Amica has an ROCE of 4.6%. In absolute terms, that’s a low return and it also under-performs the Consumer Durables industry average of 9.4%.

Check out the opportunities and risks within the PL Consumer Durables industry.

WSE:AMC Return on Capital Employed November 29th 2022

In the above chart we have measured Amica’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 report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Amica, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 18% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Amica has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To conclude, we’ve found that Amica is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 25% in the last five years. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.

Amica does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning…

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we’re helping make it simple.

Find out whether Amica is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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