Schindler Holding (VTX: SCHN) hopes to make its capital profitable
If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its profits at increasing rates of return. However, after investigation Schindler Holding (VTX: SCHN), we don’t think the current trends fit the mold of a multi-bagger.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. To calculate this metric for Schindler Holding, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.19 = CHF 1.1 billion Ã· (CHF 12 billion – CHF 5.7 billion) (Based on the last twelve months up to September 2021).
Therefore, Schindler Holding has a ROCE of 19%. On its own, that’s a standard return, but it’s far better than the 9.9% generated by the machinery industry.
See our latest analysis for Schindler Holding
Above you can see how Schindler Holding’s current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Schindler Holding.
The ROCE trend
In terms of Schindler Holding’s historic ROCE movements, the trend is not great. To be more precise, ROCE has increased from 27% over the past five years. On the flip side, the company has employed more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
Another thing to note, Schindler Holding has a high ratio of current liabilities to total assets of 49%. What this actually means is that suppliers (or short-term creditors) fund a large part of the business, so just be aware that this can introduce some elements of risk. Ideally, we would like this to decrease as that would mean less risky bonds.
What we can learn from Schindler Holding’s ROCE
In summary, while we are somewhat encouraged by Schindler Holding’s reinvestment in its own business, we are aware that returns are diminishing. Although the market should expect these trends to improve as the stock has gained 50% over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.
While Schindler Holding doesn’t shine too much in this regard, it’s still worth seeing if the company is trading at attractive prices. You can find out with our FREE estimate of intrinsic value on our platform.
While Schindler Holding does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.