Stemmer Imaging (ETR:S9I) Will Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Stemmer Imaging (ETR:S9I), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Stemmer Imaging:

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

0.058 = €4.3m ÷ (€97m - €23m) (Based on the trailing twelve months to December 2020).

Therefore, Stemmer Imaging has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.0%.

See our latest analysis for Stemmer Imaging

Above you can see how the current ROCE for Stemmer Imaging compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Stemmer Imaging here for free.

So How Is Stemmer Imaging's ROCE Trending?

On the surface, the trend of ROCE at Stemmer Imaging doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.8% from 17% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Stemmer Imaging have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last three years have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Stemmer Imaging and understanding it should be part of your investment process.

While Stemmer Imaging 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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