Some Investors May Be Worried About Siltronic's (ETR:WAF) Returns On Capital
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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Siltronic (ETR:WAF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. To calculate this metric for Siltronic, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = €279m ÷ (€4.3b - €558m) (Based on the trailing twelve months to September 2023).
Therefore, Siltronic has an ROCE of 7.4%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 18%.
Check out our latest analysis for Siltronic
Above you can see how the current ROCE for Siltronic 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 Siltronic.
What Can We Tell From Siltronic's ROCE Trend?
When we looked at the ROCE trend at Siltronic, we didn't gain much confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 7.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On Siltronic's ROCE
Bringing it all together, while we're somewhat encouraged by Siltronic's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 40% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Siltronic does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored...
While Siltronic isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
