The Returns On Capital At Paul Hartmann (FRA:PHH2) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Paul Hartmann (FRA:PHH2), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Paul Hartmann, this is the formula:

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

0.035 = €53m ÷ (€2.0b - €503m) (Based on the trailing twelve months to December 2022).

Therefore, Paul Hartmann has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.5%.

View our latest analysis for Paul Hartmann

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Paul Hartmann, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Paul Hartmann doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 3.5%. However it looks like Paul Hartmann might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Paul Hartmann's ROCE

To conclude, we've found that Paul Hartmann is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Paul Hartmann, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While Paul Hartmann 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.