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. 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. So, when we ran our eye over Galenica's (VTX:GALE) trend of ROCE, we liked what we saw.
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. The formula for this calculation on Galenica is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CHF178m ÷ (CHF2.5b - CHF754m) (Based on the trailing twelve months to June 2021).
Therefore, Galenica has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.7% generated by the Healthcare industry.
View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Galenica's ROCE
To sum it up, Galenica has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 45% return if they held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you want to continue researching Galenica, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Galenica isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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About SWX:GALE
Galenica
Operates as a healthcare service provider in Switzerland and internationally.
Flawless balance sheet and good value.
