Yahoo Finance There's Been No Shortage Of Growth Recently For Ringmetall's (ETR:HP3A) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Ringmetall (ETR:HP3A) so let's look a bit deeper.
Understanding 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. The formula for this calculation on Ringmetall is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = €16m ÷ (€139m - €34m) (Based on the trailing twelve months to June 2023).
Therefore, Ringmetall has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 11% it's much better.
View our latest analysis for Ringmetall
In the above chart we have measured Ringmetall's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Ringmetall for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Ringmetall. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 88% more capital is being employed now too. So we're very much inspired by what we're seeing at Ringmetall thanks to its ability to profitably reinvest capital.
What We Can Learn From Ringmetall's ROCE
To sum it up, Ringmetall has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 2.2% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you'd like to know about the risks facing Ringmetall, we've discovered 3 warning signs that you should be aware of.
While Ringmetall 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.
