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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at centrotherm international (FRA:CTNK) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on centrotherm international is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0047 = €363k ÷ (€291m - €213m) (Based on the trailing twelve months to June 2023).
Thus, centrotherm international has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 17%.
See our latest analysis for centrotherm international
Historical performance is a great place to start when researching a stock so above you can see the gauge for centrotherm international's ROCE against it's prior returns. If you're interested in investigating centrotherm international's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For centrotherm international Tell Us?
We're delighted to see that centrotherm international is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.5% which is a sight for sore eyes. In addition to that, centrotherm international is employing 38% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, centrotherm international's current liabilities are still rather high at 73% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From centrotherm international's ROCE
In summary, it's great to see that centrotherm international has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 160% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if centrotherm international can keep these trends up, it could have a bright future ahead.