In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at KHD Humboldt Wedag International (ETR:KWG) so let's look a bit deeper.
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 KHD Humboldt Wedag International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0045 = €543k ÷ (€238m - €117m) (Based on the trailing twelve months to June 2024).
So, KHD Humboldt Wedag International has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.
View our latest analysis for KHD Humboldt Wedag International
Historical performance is a great place to start when researching a stock so above you can see the gauge for KHD Humboldt Wedag International's ROCE against it's prior returns. If you're interested in investigating KHD Humboldt Wedag International's past further, check out this free graph covering KHD Humboldt Wedag International's past earnings, revenue and cash flow.
So How Is KHD Humboldt Wedag International's ROCE Trending?
We're delighted to see that KHD Humboldt Wedag International is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 26%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.