In This Article:
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SGL Carbon's (ETR:SGL) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on SGL Carbon is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = €88m ÷ (€1.5b - €264m) (Based on the trailing twelve months to March 2024).
Thus, SGL Carbon has an ROCE of 7.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 13%.
Check out our latest analysis for SGL Carbon
In the above chart we have measured SGL Carbon's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for SGL Carbon .
How Are Returns Trending?
SGL Carbon has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 372% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To bring it all together, SGL Carbon has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 2.8% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
One more thing, we've spotted 2 warning signs facing SGL Carbon that you might find interesting.
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.