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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Südzucker (ETR:SZU) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Südzucker is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = €298m ÷ (€9.2b - €2.8b) (Based on the trailing twelve months to November 2024).
So, Südzucker has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.
Check out our latest analysis for Südzucker
Above you can see how the current ROCE for Südzucker 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 analyst report for Südzucker .
The Trend Of ROCE
Südzucker has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 4.7% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Südzucker has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
What We Can Learn From Südzucker's ROCE
To bring it all together, Südzucker has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
Südzucker does have some risks though, and we've spotted 4 warning signs for Südzucker that you might be interested in.
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. 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.