The Returns On Capital At Stoneridge (NYSE:SRI) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Stoneridge (NYSE:SRI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Stoneridge:

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

0.0029 = US$1.3m ÷ (US$627m - US$167m) (Based on the trailing twelve months to September 2021).

Thus, Stoneridge has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.

Check out our latest analysis for Stoneridge

In the above chart we have measured Stoneridge'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 Stoneridge here for free.

So How Is Stoneridge's ROCE Trending?

When we looked at the ROCE trend at Stoneridge, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.3% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Stoneridge's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Stoneridge is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 29% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Stoneridge does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.

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.

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