Here's What To Make Of Schwälbchen Molkerei Jakob Berz's (FRA:SMB) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Schwälbchen Molkerei Jakob Berz (FRA:SMB) looks decent, right now, so lets see what the trend of returns can tell us.

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 Schwälbchen Molkerei Jakob Berz is:

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

0.14 = €8.7m ÷ (€77m - €17m) (Based on the trailing twelve months to December 2023).

Therefore, Schwälbchen Molkerei Jakob Berz has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

See our latest analysis for Schwälbchen Molkerei Jakob Berz

Historical performance is a great place to start when researching a stock so above you can see the gauge for Schwälbchen Molkerei Jakob Berz's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Schwälbchen Molkerei Jakob Berz.

What Does the ROCE Trend For Schwälbchen Molkerei Jakob Berz Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 54% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Schwälbchen Molkerei Jakob Berz has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In the end, Schwälbchen Molkerei Jakob Berz has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Schwälbchen Molkerei Jakob Berz (including 1 which is a bit unpleasant) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.