Südwestdeutsche Salzwerke (FRA:SSH) Might Be Having Difficulty Using Its Capital Effectively

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. 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. In light of that, when we looked at Südwestdeutsche Salzwerke (FRA:SSH) and its ROCE trend, we weren't exactly thrilled.

What is 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. Analysts use this formula to calculate it for Südwestdeutsche Salzwerke:

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

0.092 = €32m ÷ (€381m - €40m) (Based on the trailing twelve months to June 2021).

Thus, Südwestdeutsche Salzwerke has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Food industry average of 8.2%.

View our latest analysis for Südwestdeutsche Salzwerke

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

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

On the surface, the trend of ROCE at Südwestdeutsche Salzwerke doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Südwestdeutsche Salzwerke 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Südwestdeutsche Salzwerke is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 116% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Südwestdeutsche Salzwerke, we've discovered 1 warning sign that you should be aware of.

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.

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.

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