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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at HELLA GmbH KGaA (ETR:HLE) so let's look a bit deeper.
What Is 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. The formula for this calculation on HELLA GmbH KGaA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €552m ÷ (€7.3b - €2.6b) (Based on the trailing twelve months to September 2024).
Thus, HELLA GmbH KGaA has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.8% generated by the Auto Components industry.
Check out our latest analysis for HELLA GmbH KGaA
Above you can see how the current ROCE for HELLA GmbH KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for HELLA GmbH KGaA .
What The Trend Of ROCE Can Tell Us
HELLA GmbH KGaA has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 23% in that same time. 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.
The Bottom Line
In summary, we're delighted to see that HELLA GmbH KGaA has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 145% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.