Return Trends At SGL Carbon (ETR:SGL) Aren't Appealing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think SGL Carbon (ETR:SGL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for SGL Carbon, this is the formula:

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

0.06 = €76m ÷ (€1.6b - €287m) (Based on the trailing twelve months to June 2023).

Thus, SGL Carbon has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 14%.

Check out our latest analysis for SGL Carbon

In the above chart we have measured SGL Carbon'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 SGL Carbon.

So How Is SGL Carbon's ROCE Trending?

Over the past five years, SGL Carbon's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if SGL Carbon doesn't end up being a multi-bagger in a few years time.

The Bottom Line On SGL Carbon's ROCE

In a nutshell, SGL Carbon has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

SGL Carbon does have some risks though, and we've spotted 2 warning signs for SGL Carbon that you might be interested in.

While SGL Carbon 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. 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.