Investors Could Be Concerned With Siltronic's (ETR:WAF) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Siltronic (ETR:WAF), 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 Siltronic, this is the formula:

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

0.074 = €279m ÷ (€4.3b - €558m) (Based on the trailing twelve months to September 2023).

Therefore, Siltronic has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 17%.

Check out our latest analysis for Siltronic

In the above chart we have measured Siltronic'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 Siltronic here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Siltronic, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 7.4%. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Siltronic's ROCE

Bringing it all together, while we're somewhat encouraged by Siltronic's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Siltronic (including 2 which are a bit concerning) .

While Siltronic 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.