If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So on that note, Zehnder Group (VTX:ZEHN) looks quite promising when it comes to its capital return trends.
Understanding return on capital employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Zehnder Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = €72m ÷ (€532m – €155m) (Based on the last twelve months to June 2021).
So, Zehnder Group has a ROCE of 19%. In absolute terms, that’s a pretty normal return, and it’s a bit close to the building industry average of 23%.
Discover our latest analysis for Zehnder Group
Above you can see how Zehnder Group’s current ROCE compares to its past returns on capital, but there is little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What is the return trend?
Zehnder Group is promising given that its ROCE is trending up and to the right. Looking at the data, we can see that even though the capital employed in the business has remained relatively stable, the ROCE generated has increased by 173% over the past five years. Basically, the business generates higher returns from the same amount of capital and this is evidence that there are improvements in the efficiency of the business. It’s worth digging into this though, because while it’s great that the business is more efficient, it could also mean that in the future, areas to invest in internally for organic growth are lacking.
What we can learn from Zehnder Group’s ROCE
As noted above, Zehnder Group appears to be becoming more efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are up. And since the stock has performed exceptionally well over the past five years, these trends are taken into account by investors. Therefore, we think it would be worth checking whether these trends will continue.
Before drawing any conclusions, we need to know what value we get for the current stock price. This is where you can view our FREE Intrinsic Value Estimate which compares the stock price and the estimated value.
Although Zehnder Group does not currently achieve the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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