Returns On Capital Are Showing Encouraging Signs At Südwestdeutsche Salzwerke (FRA:SSH)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Südwestdeutsche Salzwerke (FRA:SSH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Südwestdeutsche Salzwerke is:

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

0.16 = €58m ÷ (€418m - €45m) (Based on the trailing twelve months to December 2021).

Therefore, Südwestdeutsche Salzwerke has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Food industry.

Check out our latest analysis for Südwestdeutsche Salzwerke

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Südwestdeutsche Salzwerke's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Südwestdeutsche Salzwerke's ROCE Trend?

The trends we've noticed at Südwestdeutsche Salzwerke are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 16%. 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 33%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

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 Südwestdeutsche Salzwerke has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Südwestdeutsche Salzwerke does have some risks though, and we've spotted 1 warning sign for Südwestdeutsche Salzwerke that you might be interested in.

While Südwestdeutsche Salzwerke may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.