secunet Security Networks (ETR:YSN) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at secunet Security Networks (ETR:YSN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for secunet Security Networks:

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

0.18 = €33m ÷ (€281m - €93m) (Based on the trailing twelve months to June 2023).

Thus, secunet Security Networks has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 9.9% it's much better.

View our latest analysis for secunet Security Networks

In the above chart we have measured secunet Security Networks' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for secunet Security Networks.

What The Trend Of ROCE Can Tell Us

In terms of secunet Security Networks' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 37% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On secunet Security Networks' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that secunet Security Networks is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 87% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

secunet Security Networks does have some risks though, and we've spotted 1 warning sign for secunet Security Networks that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.