There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. And in light of that, the trends we’re seeing at Autoliv’s (NYSE:ALV) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Autoliv, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.23 = US$973m ÷ (US$8.0b – US$3.8b) (Based on the trailing twelve months to June 2024).
So, Autoliv has an ROCE of 23%. That’s a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
See our latest analysis for Autoliv
Above you can see how the current ROCE for Autoliv 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 Autoliv .
What Can We Tell From Autoliv’s ROCE Trend?
Autoliv has not disappointed with their ROCE growth. 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 29% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 47% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it’s pretty high ratio, we’d remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In Conclusion…
To bring it all together, Autoliv has done well to increase the returns it’s generating from its capital employed. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren’t fully aware of the promising trends yet. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
Like most companies, Autoliv does come with some risks, and we’ve found 2 warning signs that you should be aware of.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.