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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Knaus Tabbert (ETR:KTA), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Knaus Tabbert, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = €38m ÷ (€679m - €384m) (Based on the trailing twelve months to September 2024).
Therefore, Knaus Tabbert has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto industry average of 7.3% it's much better.
View our latest analysis for Knaus Tabbert
In the above chart we have measured Knaus Tabbert's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Knaus Tabbert .
How Are Returns Trending?
On the surface, the trend of ROCE at Knaus Tabbert doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Knaus Tabbert's current liabilities are still rather high at 57% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
We're a bit apprehensive about Knaus Tabbert because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.