If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we’ve noticed some promising trends at ElringKlinger (ETR:ZIL2) so let’s look a bit deeper.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ElringKlinger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = €167m ÷ (€2.0b – €616m) (Based on the trailing twelve months to June 2023).
Thus, ElringKlinger has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 11% generated by the Auto Components industry.
View our latest analysis for ElringKlinger
In the above chart we have measured ElringKlinger’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 ElringKlinger here for free.
What Does the ROCE Trend For ElringKlinger Tell Us?
ElringKlinger is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 89% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
In Conclusion…
As discussed above, ElringKlinger appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 37% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to know some of the risks facing ElringKlinger we’ve found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.