Return Trends At ConvaTec Group (LON:CTEC) Aren't Appealing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at ConvaTec Group (LON:CTEC) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on ConvaTec Group is:

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

0.084 = US$256m ÷ (US$3.6b - US$533m) (Based on the trailing twelve months to December 2022).

Thus, ConvaTec Group has an ROCE of 8.4%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.

See our latest analysis for ConvaTec Group

In the above chart we have measured ConvaTec Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ConvaTec Group here for free.

So How Is ConvaTec Group's ROCE 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 42% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

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 16% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

ConvaTec Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.