Schlatter Industries (VTX:STRN) Has Some Way To Go To Become A Multi-Bagger

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Schlatter Industries (VTX:STRN), it didn't seem to tick all of these boxes.

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Schlatter Industries is:

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

0.099 = CHF4.6m ÷ (CHF85m - CHF38m) (Based on the trailing twelve months to June 2024).

Thus, Schlatter Industries has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

See our latest analysis for Schlatter Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Schlatter Industries' ROCE against it's prior returns. If you're interested in investigating Schlatter Industries' past further, check out this free graph covering Schlatter Industries' past earnings, revenue and cash flow.

There are better returns on capital out there than what we're seeing at Schlatter Industries. The company has consistently earned 9.9% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Schlatter Industries has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

As we've seen above, Schlatter Industries' returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 28% 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.

If you'd like to know about the risks facing Schlatter Industries, we've discovered 2 warning signs that you should be aware of.

While Schlatter Industries 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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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