secunet Security Networks (ETR:YSN) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 secunet Security Networks (ETR:YSN) and its ROCE trend, we weren't exactly thrilled.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 10% it's much better.

See our latest analysis for secunet Security Networks

Above you can see how the current ROCE for secunet Security Networks compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From secunet Security Networks' ROCE Trend?

On the surface, the trend of ROCE at secunet Security Networks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 37% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From 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. And the stock has followed suit returning a meaningful 69% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 3 warning signs facing secunet Security Networks that you might find interesting.

While secunet Security Networks isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.