Investors Could Be Concerned With Greiffenberger's (FRA:GRF) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Greiffenberger (FRA:GRF) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Greiffenberger is:

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

0.048 = €2.2m ÷ (€62m - €16m) (Based on the trailing twelve months to June 2023).

So, Greiffenberger has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for Greiffenberger

Historical performance is a great place to start when researching a stock so above you can see the gauge for Greiffenberger's ROCE against it's prior returns. If you're interested in investigating Greiffenberger's past further, check out this free graph covering Greiffenberger's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Greiffenberger's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.9%, but since then they've fallen to 4.8%. However it looks like Greiffenberger might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Greiffenberger's ROCE

To conclude, we've found that Greiffenberger is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 113% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with Greiffenberger (including 1 which is significant) .

While Greiffenberger isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.