In This Article:
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at MTU Aero Engines (ETR:MTX), it didn't seem to tick all of these boxes.
What Is 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. The formula for this calculation on MTU Aero Engines is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = €491m ÷ (€9.2b - €3.8b) (Based on the trailing twelve months to December 2022).
Thus, MTU Aero Engines has an ROCE of 9.0%. Even though it's in line with the industry average of 9.0%, it's still a low return by itself.
See our latest analysis for MTU Aero Engines
In the above chart we have measured MTU Aero Engines' 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 MTU Aero Engines here for free.
The Trend Of ROCE
When we looked at the ROCE trend at MTU Aero Engines, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 13% 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.
Another thing to note, MTU Aero Engines has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that MTU Aero Engines is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 66% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.