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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating ABO Energy GmbH KGaA (ETR:AB9), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for ABO Energy GmbH KGaA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €59m ÷ (€589m - €85m) (Based on the trailing twelve months to June 2024).
So, ABO Energy GmbH KGaA has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 3.7% it's much better.
View our latest analysis for ABO Energy GmbH KGaA
In the above chart we have measured ABO Energy GmbH KGaA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ABO Energy GmbH KGaA .
So How Is ABO Energy GmbH KGaA's ROCE Trending?
When we looked at the ROCE trend at ABO Energy GmbH KGaA, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 18% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that ABO Energy GmbH KGaA is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 30% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.