Yahoo Finance Beiersdorf's (ETR:BEI) Returns On Capital Not Reflecting Well On The Business
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Beiersdorf (ETR:BEI), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Beiersdorf is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €1.1b ÷ (€12b - €4.0b) (Based on the trailing twelve months to June 2022).
So, Beiersdorf has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Personal Products industry average of 12%.
View our latest analysis for Beiersdorf
In the above chart we have measured Beiersdorf'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 report for Beiersdorf.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Beiersdorf doesn't inspire confidence. Over the last five years, returns on capital have decreased to 13% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Beiersdorf is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 2.9% 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.
If you're still interested in Beiersdorf it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Beiersdorf isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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