Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Sulzer (VTX:SUN), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. Analysts use this formula to calculate it for Sulzer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CHF210m ÷ (CHF5.4b - CHF2.0b) (Based on the trailing twelve months to December 2020).
So, Sulzer has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.6%.
View our latest analysis for Sulzer
In the above chart we have measured Sulzer's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sulzer here for free.
So How Is Sulzer's ROCE Trending?
In terms of Sulzer's historical ROCE trend, it doesn't exactly demand attention. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 6.1%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Sulzer's ROCE
Long story short, while Sulzer has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Like most companies, Sulzer does come with some risks, and we've found 4 warning signs that you should be aware of.
While Sulzer 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. 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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About SWX:SUN
Sulzer
Develops and sells products and services for fluid engineering and chemical processing applications worldwide.
Outstanding track record with excellent balance sheet and pays a dividend.
