To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Sulzer (VTX:SUN), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Sulzer is:
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).
Therefore, Sulzer has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.8%.
View our latest analysis for Sulzer
Above you can see how the current ROCE for Sulzer compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Sulzer Tell Us?
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%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Sulzer's ROCE
In summary, Sulzer has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 4 warning signs facing Sulzer that you might find interesting.
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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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.
