If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Andritz (VIE:ANDR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Andritz is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = €326m ÷ (€7.2b - €3.7b) (Based on the trailing twelve months to June 2021).
So, Andritz has an ROCE of 9.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.
View our latest analysis for Andritz
Above you can see how the current ROCE for Andritz 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 Andritz.
What Can We Tell From Andritz's ROCE Trend?
In terms of Andritz's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.4% from 15% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Andritz's current liabilities are still rather high at 52% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Andritz's ROCE
Bringing it all together, while we're somewhat encouraged by Andritz's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Andritz does have some risks though, and we've spotted 2 warning signs for Andritz that you might be interested in.
While Andritz may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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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About WBAG:ANDR
Andritz
Provides plants, equipment, and services for pulp and paper industry, metalworking and steel industries, hydropower stations, and solid/liquid separation in the municipal and industrial sectors in Europe, North America, South America, China, Asia, and internationally.
Very undervalued with flawless balance sheet and pays a dividend.
