We Like Sensirion Holding's (VTX:SENS) Returns And Here's How They're Trending

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Sensirion Holding (VTX:SENS) we really liked what we saw.

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 Sensirion Holding:

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

0.22 = CHF51m ÷ (CHF269m - CHF34m) (Based on the trailing twelve months to December 2020).

Therefore, Sensirion Holding has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for Sensirion Holding

In the above chart we have measured Sensirion Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sensirion Holding.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Sensirion Holding are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 140% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Sensirion Holding has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Sensirion Holding's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sensirion Holding has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 55% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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