Yahoo Finance Be Wary Of Südwestdeutsche Salzwerke (FRA:SSH) And Its Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Südwestdeutsche Salzwerke (FRA:SSH), 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. To calculate this metric for Südwestdeutsche Salzwerke, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = €32m ÷ (€409m - €44m) (Based on the trailing twelve months to June 2023).
Thus, Südwestdeutsche Salzwerke has an ROCE of 8.8%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.
Check out our latest analysis for Südwestdeutsche Salzwerke
Historical performance is a great place to start when researching a stock so above you can see the gauge for Südwestdeutsche Salzwerke's ROCE against it's prior returns. If you're interested in investigating Südwestdeutsche Salzwerke's past further, check out this free graph covering Südwestdeutsche Salzwerke's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Südwestdeutsche Salzwerke, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.8% from 12% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Südwestdeutsche Salzwerke's ROCE
In summary, Südwestdeutsche Salzwerke is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 1.4% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Südwestdeutsche Salzwerke does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...
While Südwestdeutsche Salzwerke may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
