Investors Met With Slowing Returns on Capital At ConvaTec Group (LON:CTEC)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 ConvaTec Group (LON:CTEC), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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 ConvaTec Group:

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

0.069 = US$211m ÷ (US$3.7b - US$648m) (Based on the trailing twelve months to June 2022).

Thus, ConvaTec Group has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.9%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Things have been pretty stable at ConvaTec Group, 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. With that in mind, unless investment picks up again in the future, we wouldn't expect ConvaTec Group to be a multi-bagger going forward. This probably explains why ConvaTec Group is paying out 39% 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 ConvaTec Group's ROCE

In summary, ConvaTec Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 24% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

ConvaTec Group does have some risks though, and we've spotted 3 warning signs for ConvaTec Group that you might be interested in.

While ConvaTec Group 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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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.