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. So on that note, ElringKlinger (ETR:ZIL2) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on ElringKlinger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.028 = €37m ÷ (€1.9b – €633m) (Based on the trailing twelve months to September 2024).
So, ElringKlinger has an ROCE of 2.8%. In absolute terms, that’s a low return and it also under-performs the Auto Components industry average of 8.8%.
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’re interested, you can view the analysts predictions in our free analyst report for ElringKlinger .
It’s nice to see that ROCE is headed in the right direction, even if it is still relatively low. The data shows that returns on capital have increased by 143% over the trailing five years. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Speaking of capital employed, the company is actually utilizing 20% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
From what we’ve seen above, ElringKlinger has managed to increase it’s returns on capital all the while reducing it’s capital base. And since the stock has fallen 39% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
On a final note, we’ve found 1 warning sign for ElringKlinger that we think 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.