SGL Carbon (ETR:SGL) Hasn't Managed To Accelerate Its Returns
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at SGL Carbon (ETR:SGL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
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)
0.06 = €76m ÷ (€1.6b - €287m) (Based on the trailing twelve months to June 2023).
Thus, SGL Carbon has an ROCE of 6.0%. 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
Above you can see how the current ROCE for SGL Carbon 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.
What Does the ROCE Trend For SGL Carbon Tell Us?
There hasn't been much to report for SGL Carbon's returns and its level of capital employed because both metrics have been steady for the past 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 SGL Carbon in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In Conclusion...
In summary, SGL Carbon isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 32% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
SGL Carbon does have some risks though, and we've spotted 2 warning signs for SGL Carbon that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
