Investors Met With Slowing Returns on Capital At Bayerische Motoren Werke (ETR:BMW)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Bayerische Motoren Werke (ETR:BMW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Bayerische Motoren Werke, this is the formula:

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

0.08 = €14b ÷ (€252b - €81b) (Based on the trailing twelve months to March 2022).

Thus, Bayerische Motoren Werke has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Auto industry average of 7.2%.

Check out our latest analysis for Bayerische Motoren Werke

In the above chart we have measured Bayerische Motoren Werke's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Bayerische Motoren Werke here for free.

What Can We Tell From Bayerische Motoren Werke's ROCE Trend?

There are better returns on capital out there than what we're seeing at Bayerische Motoren Werke. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 41% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In summary, Bayerische Motoren Werke has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 15% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Bayerische Motoren Werke does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Bayerische Motoren Werke may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.