Schlatter Industries (VTX:STRN) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Schlatter Industries' (VTX:STRN) returns on capital, so let's have a 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. 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).

Therefore, Schlatter Industries has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.9%.

View 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 Does the ROCE Trend For Schlatter Industries Tell Us?

Schlatter Industries has recently broken into profitability so their prior investments seem to be paying off. 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 tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Schlatter Industries has decreased current liabilities to 39% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

Long story short, we're delighted to see that Schlatter Industries' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 36% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Schlatter Industries does have some risks though, and we've spotted 1 warning sign for Schlatter Industries that you might be interested in.

While Schlatter Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.