Siltronic's (ETR:WAF) Returns On Capital Not Reflecting Well On The Business
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Siltronic (ETR:WAF) and its ROCE trend, we weren't exactly thrilled.
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 Siltronic:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = €408m ÷ (€4.1b - €555m) (Based on the trailing twelve months to March 2023).
Thus, Siltronic has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Semiconductor industry average it falls behind.
View our latest analysis for Siltronic
In the above chart we have measured Siltronic'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 Siltronic here for free.
How Are Returns Trending?
When we looked at the ROCE trend at Siltronic, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 11%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Siltronic's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Siltronic is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we found 3 warning signs for Siltronic (2 are concerning) you should be aware of.
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.
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