If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Traumhaus’ (ETR:TRU) returns on capital, so let’s have a look.
Understanding 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. To calculate this metric for Traumhaus, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = €12m ÷ (€117m – €23m) (Based on the trailing twelve months to December 2021).
Therefore, Traumhaus has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 8.3% generated by the Consumer Durables industry.
Check out our latest analysis for Traumhaus
Above you can see how the current ROCE for Traumhaus 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 Traumhaus here for free.
So How Is Traumhaus’ ROCE Trending?
The trends we’ve noticed at Traumhaus are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 81% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
One more thing to note, Traumhaus has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books.
Our Take On Traumhaus’ ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Traumhaus has. And since the stock has fallen 57% over the last three years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 4 warning signs we’ve spotted with Traumhaus (including 1 which makes us a bit uncomfortable) .
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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