There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Knorr-Bremse (ETR:KBX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Knorr-Bremse:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = €731m ÷ (€8.2b - €2.8b) (Based on the trailing twelve months to September 2022).

Thus, Knorr-Bremse has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.8% it's much better.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Knorr-Bremse's ROCE Trending?

On the surface, the trend of ROCE at Knorr-Bremse doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Knorr-Bremse is reinvesting in the business, but returns have been falling. Since the stock has declined 40% over the last three years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Knorr-Bremse does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.