Schneider Electric Infrastructure (NSE:SCHNEIDER) Is Very Good At Capital Allocation

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Schneider Electric Infrastructure's (NSE:SCHNEIDER) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on Schneider Electric Infrastructure is:

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

0.36 = ₹3.5b ÷ (₹18b - ₹8.2b) (Based on the trailing twelve months to December 2024).

Therefore, Schneider Electric Infrastructure has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Electrical industry average of 19%.

See our latest analysis for Schneider Electric Infrastructure

Above you can see how the current ROCE for Schneider Electric Infrastructure 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 Infrastructure for free.

What Can We Tell From Schneider Electric Infrastructure's ROCE Trend?

Investors would be pleased with what's happening at Schneider Electric Infrastructure. The data shows that returns on capital have increased substantially over the last five years to 36%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 597%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 46%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Schneider Electric Infrastructure has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On Schneider Electric Infrastructure's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Schneider Electric Infrastructure has. And a remarkable 668% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Schneider Electric Infrastructure can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Schneider Electric Infrastructure you'll probably want to know about.

Schneider Electric Infrastructure is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.