ConvaTec Group's (LON:CTEC) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, ConvaTec Group (LON:CTEC) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ConvaTec Group, this is the formula:

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

0.075 = US$247m ÷ (US$3.7b - US$456m) (Based on the trailing twelve months to June 2021).

Therefore, ConvaTec Group has an ROCE of 7.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.7%.

View 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, you can check out the forecasts from the analysts covering ConvaTec Group here for free.

How Are Returns Trending?

ConvaTec Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 21% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On ConvaTec Group's ROCE

In summary, we're delighted to see that ConvaTec Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 23% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for ConvaTec Group you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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