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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Krones (ETR:KRN) so let's look a bit deeper.
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 Krones:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €323m ÷ (€4.7b - €2.5b) (Based on the trailing twelve months to March 2024).
So, Krones has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.
View our latest analysis for Krones
Above you can see how the current ROCE for Krones 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 Krones for free.
What The Trend Of ROCE Can Tell Us
Krones is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 50% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a separate but related note, it's important to know that Krones has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Krones' ROCE
To bring it all together, Krones has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 93% return over the last five years. In light of that, we think it's worth looking further into this stock because if Krones can keep these trends up, it could have a bright future ahead.