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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 EDAG Engineering Group's (ETR:ED4) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for EDAG Engineering Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = €38m ÷ (€724m - €259m) (Based on the trailing twelve months to September 2024).
So, EDAG Engineering Group has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Auto Components industry average of 10%.
View our latest analysis for EDAG Engineering Group
In the above chart we have measured EDAG Engineering Group'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 EDAG Engineering Group for free.
What The Trend Of ROCE Can Tell Us
EDAG Engineering Group has not disappointed with their ROCE growth. 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 118% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
What We Can Learn From EDAG Engineering Group's ROCE
To bring it all together, EDAG Engineering Group has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 16% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing EDAG Engineering Group, we've discovered 2 warning signs that you should be aware of.