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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. So when we looked at Mercedes-Benz Group (ETR:MBG) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Mercedes-Benz Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = €13b ÷ (€262b - €76b) (Based on the trailing twelve months to September 2024).
So, Mercedes-Benz Group has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Auto industry average of 7.5%.
Check out our latest analysis for Mercedes-Benz Group
Above you can see how the current ROCE for Mercedes-Benz Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Mercedes-Benz Group for free.
What The Trend Of ROCE Can Tell Us
Mercedes-Benz Group has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 169% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Mercedes-Benz Group's ROCE
To sum it up, Mercedes-Benz Group is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 73% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Mercedes-Benz Group (of which 1 doesn't sit too well with us!) that you should know about.