If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at HELLA GmbH KGaA (ETR:HLE) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding Return On Capital Employed (ROCE)
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 HELLA GmbH KGaA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.089 = €424m ÷ (€7.5b – €2.7b) (Based on the trailing twelve months to June 2024).
So, HELLA GmbH KGaA has an ROCE of 8.9%. Even though it’s in line with the industry average of 8.6%, it’s still a low return by itself.
Check out our latest analysis for HELLA GmbH KGaA
In the above chart we have measured HELLA GmbH KGaA’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 HELLA GmbH KGaA for free.
What The Trend Of ROCE Can Tell Us
There hasn’t been much to report for HELLA GmbH KGaA’s returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. So don’t be surprised if HELLA GmbH KGaA doesn’t end up being a multi-bagger in a few years time.
The Key Takeaway
In a nutshell, HELLA GmbH KGaA has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 130% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
If you’re still interested in HELLA GmbH KGaA it’s worth checking out our FREE intrinsic value approximation for HLE to see if it’s trading at an attractive price in other respects.
While HELLA GmbH KGaA isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.