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What trends should we look for if we are to identify stocks that can multiply in value over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigation Sulzer (VTX: SUN), 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 what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Sulzer, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.061 = CHF210m ÷ (CHF5.4b – CHF2.0b) (Based on the last twelve months up to December 2020).
Therefore, Sulzer has a ROCE of 6.1%. At the end of the day, that’s a low yield and it’s lower than the machinery industry average of 8.6%.
Check out our latest analysis for Sulzer
In the graph above, we measured Sulzer’s past ROCE versus its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Sulzer.
The ROCE trend
There are better returns on capital there than what we see at Sulzer. The company has steadily gained 6.1% over the past five years, and the capital employed within the company has increased by 27% during this period. Since the company has increased the amount of capital used, it seems that the investments that have been made are simply not providing a high return on capital.
The bottom line
In short, while Sulzer has reinvested its capital, the returns it generates have not increased. Given that the stock has gained an impressive 65% over the past five years, investors must think there are better things to come. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.
One more thing, we spotted 4 warning signs facing Sulzer that you might find interesting.
While Sulzer does not currently achieve 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 shares 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 the mentioned stocks.
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