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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Bayerische Motoren Werke's (ETR:BMW) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for Bayerische Motoren Werke:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = €14b ÷ (€262b - €90b) (Based on the trailing twelve months to September 2024).
Therefore, Bayerische Motoren Werke has an ROCE of 8.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.5%.
View our latest analysis for Bayerische Motoren Werke
In the above chart we have measured Bayerische Motoren Werke'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 Bayerische Motoren Werke for free.
The Trend Of ROCE
Bayerische Motoren Werke's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 46% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Key Takeaway
To sum it up, Bayerische Motoren Werke is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to know some of the risks facing Bayerische Motoren Werke we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.