ConvaTec Group (LON:CTEC) Has Some Way To Go To Become A Multi-Bagger

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at ConvaTec Group (LON:CTEC) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for ConvaTec Group:

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

0.074 = US$244m ÷ (US$3.7b - US$456m) (Based on the trailing twelve months to June 2021).

Therefore, ConvaTec Group has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 11%.

Check out our latest analysis for ConvaTec Group

Above you can see how the current ROCE for ConvaTec Group 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 report for ConvaTec Group.

How Are Returns Trending?

Over the past five years, ConvaTec Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if ConvaTec Group doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that ConvaTec Group has been paying out a decent 39% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On ConvaTec Group's ROCE

In a nutshell, ConvaTec Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 18% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 3 warning signs for ConvaTec Group you'll probably want to know about.

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.