The Returns On Capital At SNP Schneider-Neureither & Partner (ETR:SHF) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 investigating SNP Schneider-Neureither & Partner (ETR:SHF), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for SNP Schneider-Neureither & Partner:

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

0.072 = €11m ÷ (€233m - €75m) (Based on the trailing twelve months to June 2021).

Thus, SNP Schneider-Neureither & Partner has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

View our latest analysis for SNP Schneider-Neureither & Partner

In the above chart we have measured SNP Schneider-Neureither & Partner's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We weren't thrilled with the trend because SNP Schneider-Neureither & Partner's ROCE has reduced by 64% over the last five years, while the business employed 376% more capital. Usually this isn't ideal, but given SNP Schneider-Neureither & Partner conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence SNP Schneider-Neureither & Partner might not have received a full period of earnings contribution from it.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by SNP Schneider-Neureither & Partner's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

SNP Schneider-Neureither & Partner does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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