There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we’ve noticed some promising trends at Adient (NYSE:ADNT) so let’s look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Adient is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.079 = US$455m ÷ (US$9.5b – US$3.7b) (Based on the trailing twelve months to June 2023).
Therefore, Adient has an ROCE of 7.9%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 13%.
View our latest analysis for Adient
In the above chart we have measured Adient’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Adient Tell Us?
Adient has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 48%. That’s not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 31% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. A business that’s shrinking its asset base like this isn’t usually typical of a soon to be multi-bagger company.
What We Can Learn From Adient’s ROCE
In summary, it’s great to see that Adient has been able to turn things around and earn higher returns on lower amounts of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we found 2 warning signs for Adient (1 is significant) you should be aware of.
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.