Investors Could Be Concerned With Stadler Rail's (VTX:SRAIL) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Stadler Rail (VTX:SRAIL), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Stadler Rail, this is the formula:

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

0.10 = CHF166m ÷ (CHF5.3b - CHF3.7b) (Based on the trailing twelve months to June 2024).

Therefore, Stadler Rail has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Machinery industry average it falls behind.

See our latest analysis for Stadler Rail

Above you can see how the current ROCE for Stadler Rail compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Stadler Rail for free.

What Can We Tell From Stadler Rail's ROCE Trend?

When we looked at the ROCE trend at Stadler Rail, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 16% 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.

On a separate but related note, it's important to know that Stadler Rail has a current liabilities to total assets ratio of 70%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Stadler Rail's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Stadler Rail has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Stadler Rail and understanding it should be part of your investment process.

While Stadler Rail isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.