There Are Reasons To Feel Uneasy About secunet Security Networks' (ETR:YSN) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. However, after investigating secunet Security Networks (ETR:YSN), we don't think it's current trends fit the mold of a multi-bagger.

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

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 secunet Security Networks, this is the formula:

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

0.19 = €40m ÷ (€329m - €113m) (Based on the trailing twelve months to December 2023).

Thus, secunet Security Networks has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 9.6% it's much better.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for secunet Security Networks .

How Are Returns Trending?

When we looked at the ROCE trend at secunet Security Networks, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 19%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for secunet Security Networks. In light of this, the stock has only gained 9.9% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

secunet Security Networks could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for YSN on our platform quite valuable.

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.

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