If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So while Knorr-Bremse (ETR:KBX) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Knorr-Bremse:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = €973m ÷ (€8.2b – €3.2b) (Based on the trailing twelve months to June 2024).
So, Knorr-Bremse has an ROCE of 20%. That’s a fantastic return and not only that, it outpaces the average of 9.8% earned by companies in a similar industry.
See our latest analysis for Knorr-Bremse
In the above chart we have measured Knorr-Bremse’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Knorr-Bremse .
The Trend Of ROCE
On the surface, the trend of ROCE at Knorr-Bremse doesn’t inspire confidence. Historically returns on capital were even higher at 25%, but they have dropped over the last five years. However it looks like Knorr-Bremse might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Knorr-Bremse’s ROCE
In summary, Knorr-Bremse is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Unsurprisingly, the stock has only gained 2.8% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you’re hunting for a multi-bagger, we think you’d have more luck elsewhere.
Like most companies, Knorr-Bremse does come with some risks, and we’ve found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.