Ringmetall (ETR:HP3A) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Ringmetall (ETR:HP3A) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Ringmetall:

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

0.16 = €16m ÷ (€139m - €34m) (Based on the trailing twelve months to June 2023).

Thus, Ringmetall has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.

View our latest analysis for Ringmetall

In the above chart we have measured Ringmetall'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 Ringmetall for free.

So How Is Ringmetall's ROCE Trending?

Investors would be pleased with what's happening at Ringmetall. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 88%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Ringmetall's ROCE

To sum it up, Ringmetall has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 21% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

If you want to continue researching Ringmetall, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Ringmetall 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.