There Are Reasons To Feel Uneasy About Strattec Security's (NASDAQ:STRT) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Strattec Security (NASDAQ:STRT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Strattec Security:

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

0.058 = US$13m ÷ (US$306m - US$75m) (Based on the trailing twelve months to March 2021).

So, Strattec Security has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

See our latest analysis for Strattec Security

Above you can see how the current ROCE for Strattec Security 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 Strattec Security.

What Does the ROCE Trend For Strattec Security Tell Us?

On the surface, the trend of ROCE at Strattec Security doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.8% from 10% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Strattec Security's ROCE

In summary, we're somewhat concerned by Strattec Security's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in Strattec Security it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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. 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.
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