Stratec (ETR:SBS) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Stratec (ETR:SBS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Stratec:

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

0.14 = €43m ÷ (€356m - €47m) (Based on the trailing twelve months to March 2021).

Thus, Stratec has an ROCE of 14%. In absolute terms, that's a pretty standard return but compared to the Medical Equipment industry average it falls behind.

Check out our latest analysis for Stratec

Above you can see how the current ROCE for Stratec 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 Stratec here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Stratec, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Stratec has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Stratec's ROCE

While returns have fallen for Stratec in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 154% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Stratec, we've discovered 1 warning sign that you should be aware of.

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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