To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Brüder Mannesmann's (FRA:BMM) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Brüder Mannesmann is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = €3.3m ÷ (€42m - €12m) (Based on the trailing twelve months to December 2021).
So, Brüder Mannesmann has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Retail Distributors industry average it falls behind.
See our latest analysis for Brüder Mannesmann
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Brüder Mannesmann has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Brüder Mannesmann's ROCE Trending?
Investors would be pleased with what's happening at Brüder Mannesmann. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. 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.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 29%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Brüder Mannesmann has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On Brüder Mannesmann's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Brüder Mannesmann has. And with a respectable 62% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Brüder Mannesmann can keep these trends up, it could have a bright future ahead.