What are the early trends to look for to identify a stock that could multiply in value over the long term? Typically, we will want to notice a growth trend 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. In light of this, when we looked Schindler Holding (VTX:SCHN) and its ROCE trend, we weren’t exactly thrilled.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Schindler Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.19 = CHF 1.1 billion ÷ (CHF 12 billion – CHF 6.0 billion) (Based on the last twelve months to December 2021).
So, Schindler Holding has a ROCE of 19%. By itself, that’s standard efficiency, but it’s far better than the 13% generated by the machine industry.
Check out our latest analysis for Schindler Holding
In the chart above, we measured Schindler Holding’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view forecasts from analysts covering Schindler Holding here for free.
What the ROCE trend can tell us
In terms of historical movements in Schindler Holding’s ROCE, the trend is not fantastic. Over the past five years, capital returns have declined to 19% from 27% five years ago. On the other hand, 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 investments. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.
Furthermore, current liabilities of Schindler Holding are still quite high at 50% of total assets. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
Finally, we found that Schindler Holding is reinvesting in the business, but returns have fallen. And investors may recognize these trends since the stock has only returned 6.8% to shareholders over the past five years. Therefore, if you are looking for a multi-bagger, we suggest you consider other options.
One more thing to note, we have identified 1 warning sign with Schindler Holding and understanding it should be part of your investment process.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.