Returns At Stratec (ETR:SBS) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Stratec (ETR:SBS) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Stratec, this is the formula:

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

0.063 = €22m ÷ (€451m - €93m) (Based on the trailing twelve months to September 2024).

Therefore, Stratec has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.

Check out our latest analysis for Stratec

In the above chart we have measured Stratec'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 Stratec for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Stratec. The company has consistently earned 6.3% for the last five years, and the capital employed within the business has risen 40% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

As we've seen above, Stratec's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Stratec has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with Stratec and understanding this should be part of your investment process.

While Stratec may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.