The Returns On Capital At Jenoptik (ETR:JEN) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Jenoptik (ETR:JEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Jenoptik, this is the formula:

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

0.078 = €81m ÷ (€1.5b - €446m) (Based on the trailing twelve months to March 2021).

So, Jenoptik has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Electronic industry average of 9.0%.

View our latest analysis for Jenoptik

Above you can see how the current ROCE for Jenoptik 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.

The Trend Of ROCE

When we looked at the ROCE trend at Jenoptik, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.8% from 10% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Jenoptik's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Jenoptik does come with some risks, and we've found 4 warning signs that you should be aware of.

While Jenoptik may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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