Returns Are Gaining Momentum At Greiffenberger (FRA:GRF)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Greiffenberger (FRA:GRF) so let's look a bit deeper.

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. The formula for this calculation on Greiffenberger is:

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

0.094 = €4.4m ÷ (€59m - €13m) (Based on the trailing twelve months to December 2022).

Thus, Greiffenberger has an ROCE of 9.4%. On its own, that's a low figure but it's around the 11% average generated by the Machinery industry.

See 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 of past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% more capital is being employed now too. So we're very much inspired by what we're seeing at Greiffenberger thanks to its ability to profitably reinvest capital.

What We Can Learn From Greiffenberger's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Greiffenberger has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. In light of that, we think it's worth looking further into this stock because if Greiffenberger can keep these trends up, it could have a bright future ahead.

Greiffenberger does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.