ConvaTec Group (LON:CTEC) Hasn't Managed To Accelerate Its Returns
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating ConvaTec Group (LON:CTEC), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on ConvaTec Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$256m ÷ (US$3.6b - US$533m) (Based on the trailing twelve months to December 2022).
Thus, ConvaTec Group has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.4%.
View our latest analysis for ConvaTec Group
In the above chart we have measured ConvaTec Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ConvaTec Group here for free.
What Can We Tell From ConvaTec Group's ROCE Trend?
Things have been pretty stable at ConvaTec Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at ConvaTec Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. With fewer investment opportunities, it makes sense that ConvaTec Group has been paying out a decent 42% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On ConvaTec Group's ROCE
In summary, ConvaTec Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 7.6% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
On a final note, we found 4 warning signs for ConvaTec Group (1 shouldn't be ignored) you should be aware of.
While ConvaTec Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.
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