If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Knorr-Bremse (ETR:KBX), it didn’t seem to tick all of these boxes.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Knorr-Bremse, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = €770m ÷ (€8.8b – €2.6b) (Based on the trailing twelve months to September 2025).
Thus, Knorr-Bremse has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 9.4% generated by the Machinery industry.
See our latest analysis for Knorr-Bremse
Above you can see how the current ROCE for Knorr-Bremse 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 Knorr-Bremse .
In terms of Knorr-Bremse’s historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 20% 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’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Knorr-Bremse has done well to pay down its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.
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. Additionally, the stock’s total return to shareholders over the last five years has been flat, which isn’t too surprising. Therefore based on the analysis done in this article, we don’t think Knorr-Bremse has the makings of a multi-bagger.
On a separate note, we’ve found 1 warning sign for Knorr-Bremse you’ll probably want to know about.
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.