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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Eigenheim Union 1898 Beteiligungs' (ETR:JZ6) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Eigenheim Union 1898 Beteiligungs:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = €3.0m ÷ (€52m - €14m) (Based on the trailing twelve months to June 2023).
Thus, Eigenheim Union 1898 Beteiligungs has an ROCE of 7.8%. In absolute terms, that's a low return, but it's much better than the Consumer Durables industry average of 6.3%.
See our latest analysis for Eigenheim Union 1898 Beteiligungs
In the above chart we have measured Eigenheim Union 1898 Beteiligungs' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Eigenheim Union 1898 Beteiligungs .
What Can We Tell From Eigenheim Union 1898 Beteiligungs' ROCE Trend?
Eigenheim Union 1898 Beteiligungs has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses two years ago, but has managed to turn it around and as we saw earlier is now earning 7.8%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 27% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.