Why The 28% Return On Capital At CropEnergies (ETR:CE2) Should Have Your Attention
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of CropEnergies (ETR:CE2) we really liked what we saw.
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. The formula for this calculation on CropEnergies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = €268m ÷ (€1.2b - €239m) (Based on the trailing twelve months to August 2022).
So, CropEnergies has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 23% earned by companies in a similar industry.
View our latest analysis for CropEnergies
In the above chart we have measured CropEnergies' 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 report on analyst forecasts for the company.
The Trend Of ROCE
The trends we've noticed at CropEnergies are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 28%. The amount of capital employed has increased too, by 101%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that CropEnergies is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 113% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
CropEnergies does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
CropEnergies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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