Be Wary Of CompuGroup Medical SE KGaA (ETR:COP) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 CompuGroup Medical SE KGaA (ETR:COP) 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 CompuGroup Medical SE KGaA:

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

0.057 = €93m ÷ (€2.0b - €336m) (Based on the trailing twelve months to September 2022).

So, CompuGroup Medical SE KGaA has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 11%.

See our latest analysis for CompuGroup Medical SE KGaA

In the above chart we have measured CompuGroup Medical SE KGaA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering CompuGroup Medical SE KGaA here for free.

What Can We Tell From CompuGroup Medical SE KGaA's ROCE Trend?

When we looked at the ROCE trend at CompuGroup Medical SE KGaA, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From CompuGroup Medical SE KGaA's ROCE

While returns have fallen for CompuGroup Medical SE KGaA in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 2.3% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

CompuGroup Medical SE KGaA does have some risks though, and we've spotted 1 warning sign for CompuGroup Medical SE KGaA that you might be interested in.

While CompuGroup Medical SE KGaA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.