Returns On Capital At Leifheit (ETR:LEI) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Leifheit (ETR:LEI) and its ROCE trend, we weren't exactly thrilled.

What is 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 Leifheit is:

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

0.11 = €19m ÷ (€230m - €57m) (Based on the trailing twelve months to December 2020).

Thus, Leifheit has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Consumer Durables industry.

View our latest analysis for Leifheit

Above you can see how the current ROCE for Leifheit compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Leifheit here for free.

What Can We Tell From Leifheit's ROCE Trend?

There hasn't been much to report for Leifheit's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Leifheit to be a multi-bagger going forward. That being the case, it makes sense that Leifheit has been paying out 71% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

In Conclusion...

In a nutshell, Leifheit has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 99% 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.

On a final note, we found 2 warning signs for Leifheit (1 is a bit unpleasant) you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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