Returns Are Gaining Momentum At SGL Carbon (ETR:SGL)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at SGL Carbon (ETR:SGL) so let's look a bit deeper.
Understanding 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 SGL Carbon:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = €74m ÷ (€1.4b - €247m) (Based on the trailing twelve months to September 2023).
Thus, SGL Carbon has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 13%.
View our latest analysis for SGL Carbon
In the above chart we have measured SGL Carbon's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SGL Carbon.
So How Is SGL Carbon's ROCE Trending?
SGL Carbon has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 24% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
Our Take On SGL Carbon's ROCE
To sum it up, SGL Carbon is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 19% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
SGL Carbon does have some risks though, and we've spotted 2 warning signs for SGL Carbon that you might be interested in.
While SGL Carbon 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.
