To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Knorr-Bremse (ETR:KBX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Knorr-Bremse is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = €741m ÷ (€8.1b - €2.6b) (Based on the trailing twelve months to March 2023).
So, Knorr-Bremse has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 10% it's much better.
See our latest analysis for Knorr-Bremse
In the above chart we have measured Knorr-Bremse'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 Knorr-Bremse here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Knorr-Bremse, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. 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.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Knorr-Bremse is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know about the risks facing Knorr-Bremse, we've discovered 1 warning sign that you should be aware of.
While Knorr-Bremse isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.