Beiersdorf (ETR:BEI) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Beiersdorf (ETR:BEI) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Beiersdorf, this is the formula:

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

0.14 = €1.1b ÷ (€11b - €3.0b) (Based on the trailing twelve months to June 2021).

So, Beiersdorf has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Personal Products industry.

View our latest analysis for Beiersdorf

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

So How Is Beiersdorf's ROCE Trending?

When we looked at the ROCE trend at Beiersdorf, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 Beiersdorf's ROCE

To conclude, we've found that Beiersdorf is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 20% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

While Beiersdorf doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Beiersdorf 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.