To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we’ve noticed some promising trends at Adient (NYSE:ADNT) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Adient:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.072 = US$387m ÷ (US$9.1b – US$3.7b) (Based on the trailing twelve months to June 2024).
Therefore, Adient has an ROCE of 7.2%. In absolute terms, that’s a low return and it also under-performs the Auto Components industry average of 11%.
See 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’d like, you can check out the forecasts from the analysts covering Adient for free.
The Trend Of ROCE
Adient is showing promise given that its ROCE is trending up and to the right. 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 140% 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. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
On a separate but related note, it’s important to know that Adient has a current liabilities to total assets ratio of 41%, 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. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Adient’s ROCE
To bring it all together, Adient has done well to increase the returns it’s generating from its capital employed. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a final note, we found 3 warning signs for Adient (1 can’t be ignored) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.