Investors Met With Slowing Returns on Capital At Galenica (VTX:GALE)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Galenica (VTX:GALE), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Galenica, this is the formula:

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

0.095 = CHF163m ÷ (CHF2.3b - CHF547m) (Based on the trailing twelve months to December 2020).

So, Galenica has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.6% generated by the Healthcare industry, it's much better.

See our latest analysis for Galenica

Above you can see how the current ROCE for Galenica compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Galenica here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Galenica. The company has employed 46% more capital in the last five years, and the returns on that capital have remained stable at 9.5%. 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.

Our Take On Galenica's ROCE

In summary, Galenica has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 27% over the last three 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Galenica (of which 1 can't be ignored!) that you should know about.

While Galenica 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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