Investors encounter slowing capital returns at SPIE (EPA:SPIE)


There are a few key trends to look out for if we want to identify the next multi-bagger. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Although, when we looked SPIE (EPA:SPIE), it didn’t seem to tick all those boxes.

Understanding return on capital employed (ROCE)

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for SPIE:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.081 = €406m ÷ (€8.6bn – €3.6bn) (Based on the last twelve months to December 2021).

Thereby, SPIE posted a ROCE of 8.1%. Even though it’s in line with the industry average of 7.9%, it’s still a poor performer on its own.

See our latest analysis for SPIE

ENXTPA:SPIE Return on Capital Employed May 4, 2022

Above, you can see how SPIE’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What can we say about SPIE’s ROCE trend?

There are better returns on capital than what we see at SPIE. The company has employed 58% more capital over the past five years, and the return on that capital has remained stable at 8.1%. Since the company has increased the amount of capital employed, it appears that the investments that have been made simply do not provide a high return on capital.

It should also be noted that SPIE has a high ratio of current liabilities to total assets of 42%. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Although this is not necessarily a bad thing, it can be beneficial if this ratio is lower.

The essentials of SPIE’s ROCE

In summary, SPIE simply reinvested capital and generated the same low rate of return as before. Unsurprisingly, the stock has only gained 1.2% over the past five years, potentially indicating that investors are taking this into account going forward. So if you’re looking for a multi-bagger, we think you’d have better luck elsewhere.

If you wish to continue your research on SPIE, you may be interested in knowing the 3 warning signs that our analysis found.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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