Schlatter Industries (VTX:STRN) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Schlatter Industries (VTX:STRN) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Schlatter Industries, this is the formula:

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

0.0083 = CHF307k ÷ (CHF61m - CHF24m) (Based on the trailing twelve months to June 2021).

Thus, Schlatter Industries has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.9%.

Check out our latest analysis for Schlatter Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Schlatter Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Schlatter Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The fact that Schlatter Industries is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Schlatter Industries is utilizing 46% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 39%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Schlatter Industries' ROCE

In summary, it's great to see that Schlatter Industries has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Schlatter Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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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