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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at SGL Carbon (ETR:SGL) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for SGL Carbon:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = €75m ÷ (€1.5b - €271m) (Based on the trailing twelve months to September 2024).
So, SGL Carbon has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.
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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for SGL Carbon .
What Can We Tell From SGL Carbon's ROCE Trend?
Shareholders will be relieved that SGL Carbon has broken into profitability. The company now earns 6.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
To sum it up, SGL Carbon is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for SGL on our platform that is definitely worth checking out.