Investors Met With Slowing Returns on Capital At Carl Zeiss Meditec (ETR:AFX)

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. So, when we ran our eye over Carl Zeiss Meditec's (ETR:AFX) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Carl Zeiss Meditec, this is the formula:

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

0.13 = €235m ÷ (€2.2b - €348m) (Based on the trailing twelve months to March 2021).

Therefore, Carl Zeiss Meditec has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Medical Equipment industry average it falls behind.

See our latest analysis for Carl Zeiss Meditec

Above you can see how the current ROCE for Carl Zeiss Meditec 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 Carl Zeiss Meditec here for free.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 97% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Carl Zeiss Meditec 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.

The Bottom Line On Carl Zeiss Meditec's ROCE

In the end, Carl Zeiss Meditec has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 498% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Carl Zeiss Meditec does come with some risks, and we've found 1 warning sign that you should be aware of.

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. 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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