Stadler Rail (VTX:SRAIL) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Stadler Rail (VTX:SRAIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Stadler Rail is:

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

0.096 = CHF146m ÷ (CHF4.5b - CHF3.0b) (Based on the trailing twelve months to December 2020).

So, Stadler Rail has an ROCE of 9.6%. Even though it's in line with the industry average of 9.6%, it's still a low return by itself.

See our latest analysis for Stadler Rail

In the above chart we have measured Stadler Rail'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

On the surface, the trend of ROCE at Stadler Rail doesn't inspire confidence. Over the last three years, returns on capital have decreased to 9.6% from 19% three 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 separate but related note, it's important to know that Stadler Rail has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. 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.

In Conclusion...

In summary, Stadler Rail is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 11% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with Stadler Rail (including 2 which are a bit concerning) .

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.

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