Yahoo Finance Is Convatec Group (LON:CTEC) Likely To Turn Things Around?
Want to participate in a short research study? Help shape the future of investing tools and earn a $40 gift card!
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Convatec Group (LON:CTEC), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Convatec Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$214m ÷ (US$3.6b - US$397m) (Based on the trailing twelve months to December 2019).
So, Convatec Group has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 12%.
See our latest analysis for Convatec Group
Above you can see how the current ROCE for Convatec Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Convatec Group here for free.
What The Trend Of ROCE Can Tell Us
Over the past five years, Convatec Group's ROCE and capital employed have both remained mostly flat. 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Convatec Group to be a multi-bagger going forward. This probably explains why Convatec Group is paying out 44% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
The Bottom Line On Convatec Group's ROCE
In summary, Convatec Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last three years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we've found 4 warning signs for Convatec Group that we think you should be aware of.
While Convatec Group 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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
