Returns On Capital At Stemmer Imaging (ETR:S9I) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So, when we ran our eye over Stemmer Imaging's (ETR:S9I) trend of ROCE, we liked what we saw.

What is 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. To calculate this metric for Stemmer Imaging, this is the formula:

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

0.18 = €15m ÷ (€108m - €25m) (Based on the trailing twelve months to March 2022).

Thus, Stemmer Imaging has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Electronic industry.

See our latest analysis for Stemmer Imaging

In the above chart we have measured Stemmer Imaging's 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 Stemmer Imaging.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 323% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Stemmer Imaging has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Stemmer Imaging has done well to reduce current liabilities to 23% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Stemmer Imaging's ROCE

To sum it up, Stemmer Imaging has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 13% over the last three years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a final note, we've found 1 warning sign for Stemmer Imaging that we think you should be aware of.

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.