Stock Analysis

Strabag (VIE:STR) Is Experiencing Growth In Returns On Capital

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WBAG:STR
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Strabag (VIE:STR) looks quite promising in regards to its trends of return on capital.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Strabag, this is the formula:

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

0.099 = €600m ÷ (€12b - €6.2b) (Based on the trailing twelve months to June 2022).

Therefore, Strabag has an ROCE of 9.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.7%.

View our latest analysis for Strabag

roce
WBAG:STR Return on Capital Employed December 1st 2022

Above you can see how the current ROCE for Strabag compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Strabag's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 225% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Strabag has a high ratio of current liabilities to total assets of 51%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're delighted to see that Strabag has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Strabag can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Strabag, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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.

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