We Like These Underlying Return On Capital Trends At STEICO (ETR:ST5)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in STEICO's (ETR:ST5) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for STEICO, this is the formula:

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

0.11 = €32m ÷ (€363m - €57m) (Based on the trailing twelve months to December 2020).

Thus, STEICO has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Building industry.

See our latest analysis for STEICO

Above you can see how the current ROCE for STEICO 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.

What Can We Tell From STEICO's ROCE Trend?

STEICO is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 80%. So we're very much inspired by what we're seeing at STEICO thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that STEICO can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if STEICO can keep these trends up, it could have a bright future ahead.

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

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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