Our Take On The Returns On Capital At Stadler Rail (VTX:SRAIL)

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Stadler Rail (VTX:SRAIL), it didn't seem to tick all of these boxes.

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 Stadler Rail, this is the formula:

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

0.098 = CHF142m ÷ (CHF4.0b - CHF2.6b) (Based on the trailing twelve months to June 2020).

Therefore, Stadler Rail has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 8.1% generated by the Machinery industry, it's much better.

View 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 here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Stadler Rail, we didn't gain much confidence. Around two years ago the returns on capital were 17%, but since then they've fallen to 9.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Stadler Rail's current liabilities are still rather high at 64% of total assets. 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 Bottom Line On Stadler Rail's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Stadler Rail. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Stadler Rail, we've spotted 4 warning signs, and 2 of them are potentially serious.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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