If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Schneider Electric (EPA:SU), 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 Schneider Electric:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = €3.6b ÷ (€46b – €12b) (Based on the trailing twelve months to June 2020).
So, Schneider Electric has an ROCE of 10%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Electrical industry average of 11%.
Above you can see how the current ROCE for Schneider Electric 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 Schneider Electric here for free.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Schneider Electric, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So unless we see a substantial change at Schneider Electric in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger. This probably explains why Schneider Electric is paying out 55% of its income to shareholders in the form of dividends. Given the business isn’t reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
Our Take On Schneider Electric’s ROCE
In summary, Schneider Electric isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 144% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
One more thing, we’ve spotted 1 warning sign facing Schneider Electric that you might find interesting.
While Schneider Electric isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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