We like these underlying return on capital trends for Schaltbau Holding (HMSE:SLT)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends to look out for. Typically we want to notice a growth trend to return on capital employed (ROCE) and, as a result, a growing one base of the capital employed. Put simply, such companies are compounding machines, meaning they continually reinvest their profits at ever-increasing returns. Speaking of which, we've noticed some great changes Schaltbau Holding (HMSE:SLT) return on capital, so let's take a look.

What is Return on Capital Employed (ROCE)?

If you've never worked with ROCE before, it measures the “return” (profit before taxes) that a company generates from the capital employed in its business. Analysts calculate it for Schaltbau Holding using this formula:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.086 = €30 million ÷ (€658 million – €308 million) (Based on the last twelve months ended December 2022).

So, Schaltbau Holding has a ROCE of 8.6%. Ultimately, this is a low return and is below the machinery industry average of 11%.

Check out our current analysis of Schaltbau Holding

Even if the past is not representative of the future, it can be helpful to know how a company has performed in the past. That's why we have this chart above. If you want to look at historical returns, check these out free Graphics on the sales and cash flow development of Schaltbau Holding.

What does Schaltbau Holding's ROCE trend tell us?

We are pleased that Schaltbau Holding's investments are paying off and are now generating a pre-tax profit. About five years ago, the company was making a loss, but things have turned around as it now earns 8.6% of its capital. Additionally, Schaltbau Holding is deploying 38% more capital than before, which is expected from a company trying to break even. We like this trend because it shows us that there are profitable reinvestment opportunities available to the company, and if this trend continues, it can lead to multi-bagger performance.

On a separate but related note, it is important to note that Schaltbau Holding has a current liabilities to total assets ratio of 47%, which we consider to be quite high. This can entail certain risks, as the company is fundamentally dependent to a relatively large extent on its suppliers or other short-term creditors. While it's not necessarily a bad thing, having this ratio lower can be beneficial.

The story goes on

Finally…

In summary, it is great to see that Schaltbau Holding has broken through to profitability and continues to reinvest in its business. Given that the stock has only returned 3.2% for shareholders over the last year, its promising fundamentals may not yet be recognized by investors. So if you learn more about this stock, there could be good opportunities if the valuation and other metrics are right.

We have found that Schaltbau Holding poses some risks 3 warning signs (and 2 that make us uncomfortable) we think you should know.

Even if Schaltbau Holding doesn't generate the highest returns, take a look here free List of companies that generate high returns on equity with solid balance sheets.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.