What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Schneider Electric Infrastructure (NSE:SCHNEIDER) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Schneider Electric Infrastructure:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.32 = ₹2.2b ÷ (₹14b – ₹7.3b) (Based on the trailing twelve months to September 2023).
So, Schneider Electric Infrastructure has an ROCE of 32%. That’s a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
Check out our latest analysis for Schneider Electric Infrastructure
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Schneider Electric Infrastructure’s past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Schneider Electric Infrastructure has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 32% on its capital. In addition to that, Schneider Electric Infrastructure is employing 329% more capital than previously which is expected of a company that’s trying to break into profitability. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 52%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On Schneider Electric Infrastructure’s ROCE
Overall, Schneider Electric Infrastructure gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 347% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Schneider Electric Infrastructure does come with some risks, and we’ve found 1 warning sign that you should be aware of.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.