There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Schneider Electric’s (EPA:SU) returns on capital, so let’s have a look.
What Is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Schneider Electric:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = €5.9b ÷ (€59b – €17b) (Based on the trailing twelve months to June 2023).
Therefore, Schneider Electric has an ROCE of 14%. That’s a relatively normal return on capital, and it’s around the 13% generated by the Electrical industry.
Above you can see how the current ROCE for Schneider Electric compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Schneider Electric.
What The Trend Of ROCE Can Tell Us
Schneider Electric is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 14%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 33%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
In Conclusion…
In summary, it’s great to see that Schneider Electric can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 149% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you’d like to know about the risks facing Schneider Electric, we’ve discovered 1 warning sign that you should be aware of.
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