In This Article:
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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Sulzer (VTX:SUN), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Sulzer:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = CHF193m ÷ (CHF4.8b - CHF2.2b) (Based on the trailing twelve months to June 2022).
Thus, Sulzer has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 16%.
View our latest analysis for Sulzer
Above you can see how the current ROCE for Sulzer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sulzer here for free.
How Are Returns Trending?
There hasn't been much to report for Sulzer's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Sulzer doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that Sulzer has been paying out a large portion (63%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than7.7% because total capital employed would be higher.The 7.7% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.