Here's What's Concerning About CompuGroup Medical SE KGaA's (ETR:COP) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at CompuGroup Medical SE KGaA (ETR:COP), it didn't seem to tick all of these boxes.

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. The formula for this calculation on CompuGroup Medical SE KGaA is:

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

0.08 = €108m ÷ (€1.9b - €509m) (Based on the trailing twelve months to March 2022).

So, CompuGroup Medical SE KGaA has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Healthcare Services industry average of 13%.

See our latest analysis for CompuGroup Medical SE KGaA

Above you can see how the current ROCE for CompuGroup Medical SE KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CompuGroup Medical SE KGaA.

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

In terms of CompuGroup Medical SE KGaA's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.0% from 13% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On CompuGroup Medical SE KGaA's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CompuGroup Medical SE KGaA. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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.