Some Investors May Be Worried About Carl Zeiss Meditec's (ETR:AFX) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Carl Zeiss Meditec (ETR:AFX) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for Carl Zeiss Meditec:

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

0.11 = €271m ÷ (€2.9b - €507m) (Based on the trailing twelve months to June 2024).

Thus, Carl Zeiss Meditec has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.4% it's much better.

Check out 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 for free.

The Trend Of ROCE

When we looked at the ROCE trend at Carl Zeiss Meditec, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 11%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

To conclude, we've found that Carl Zeiss Meditec is reinvesting in the business, but returns have been falling. Since the stock has declined 40% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Carl Zeiss Meditec has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Carl Zeiss Meditec you'll probably want to know about.

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. 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.