Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. 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)?
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 ElringKlinger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.069 = €93m ÷ (€2.0b – €647m) (Based on the trailing twelve months to June 2024).
Thus, ElringKlinger has an ROCE of 6.9%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 8.6%.
View our latest analysis for ElringKlinger
Above you can see how the current ROCE for ElringKlinger compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for ElringKlinger .
How Are Returns Trending?
ElringKlinger’s ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 167% over the last five years. 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.
The Bottom Line
In summary, we’re delighted to see that ElringKlinger has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 20% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you’d like to know about the risks facing ElringKlinger, we’ve discovered 1 warning sign that 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.