Returns On Capital Signal Tricky Times Ahead For secunet Security Networks (ETR:YSN)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at secunet Security Networks (ETR:YSN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on secunet Security Networks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = €33m ÷ (€281m - €93m) (Based on the trailing twelve months to June 2023).
Therefore, secunet Security Networks has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 10% it's much better.
View our latest analysis for secunet Security Networks
Above you can see how the current ROCE for secunet Security Networks compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is secunet Security Networks' ROCE Trending?
On the surface, the trend of ROCE at secunet Security Networks doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 37% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that secunet Security Networks is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 91% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One more thing, we've spotted 3 warning signs facing secunet Security Networks that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
