ElringKlinger (ETR:ZIL2) Shareholders Will Want The ROCE Trajectory To Continue
To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 ElringKlinger (ETR:ZIL2) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on ElringKlinger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €170m ÷ (€2.0b - €702m) (Based on the trailing twelve months to September 2023).
Thus, ElringKlinger has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Auto Components industry.
See our latest analysis for ElringKlinger
In the above chart we have measured ElringKlinger'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 ElringKlinger for free.
The Trend Of ROCE
ElringKlinger's ROCE growth is quite impressive. 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 95% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
To bring it all together, ElringKlinger has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 2 warning signs facing ElringKlinger that you might find interesting.
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.
