CompuGroup Medical SE KGaA (ETR:COP) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
April 11, 2021
XTRA:COP

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at CompuGroup Medical SE KGaA (ETR:COP), it didn't seem to tick all of these boxes.

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. To calculate this metric for CompuGroup Medical SE KGaA, this is the formula:

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

0.094 = €120m ÷ (€1.6b - €291m) (Based on the trailing twelve months to December 2020).

Thus, CompuGroup Medical SE KGaA has an ROCE of 9.4%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.

Check out our latest analysis for CompuGroup Medical SE KGaA

roce
XTRA:COP Return on Capital Employed April 11th 2021

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 12% five years ago, while capital employed has grown 113%. That being said, CompuGroup Medical SE KGaA raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with CompuGroup Medical SE KGaA's earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

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

In summary, despite lower returns in the short term, we're encouraged to see that CompuGroup Medical SE KGaA is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 106% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a separate note, we've found 2 warning signs for CompuGroup Medical SE KGaA you'll probably want to know about.

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.

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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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