If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Looking at Autoliv (NYSE:ALV), it does have a high ROCE right now, but lets see how returns are trending.
What Is 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. Analysts use this formula to calculate it for Autoliv:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = US$888m ÷ (US$8.3b – US$4.0b) (Based on the trailing twelve months to December 2023).
Thus, Autoliv has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Auto Components industry average of 11%.
Check out our latest analysis for Autoliv
In the above chart we have measured Autoliv’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 Autoliv for free.
What Does the ROCE Trend For Autoliv Tell Us?
There hasn’t been much to report for Autoliv’s returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So it may not be a multi-bagger in the making, but given the decent 21% return on capital, it’d be difficult to find fault with the business’s current operations.
On a separate but related note, it’s important to know that Autoliv has a current liabilities to total assets ratio of 48%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In summary, Autoliv isn’t compounding its earnings but is generating decent returns on the same amount of capital employed. Since the stock has gained an impressive 69% over the last five years, investors must think there’s better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
Autoliv does have some risks though, and we’ve spotted 3 warning signs for Autoliv that you might be interested in.
Autoliv is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.