Returns On Capital Are Showing Encouraging Signs At SGL Carbon (ETR:SGL)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 on that note, SGL Carbon (ETR:SGL) looks quite promising in regards to its trends of return on capital.

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)

0.064 = €74m ÷ (€1.4b - €247m) (Based on the trailing twelve months to September 2023).

Therefore, SGL Carbon has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 13%.

View 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.

What Does the ROCE Trend For SGL Carbon Tell Us?

SGL Carbon is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 24% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On SGL Carbon's ROCE

To sum it up, SGL Carbon is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 7.5% 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.

Like most companies, SGL Carbon does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.