If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Bayerische Motoren Werke (ETR:BMW), we don't think it's current trends fit the mold of a multi-bagger.
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 Bayerische Motoren Werke:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = €6.2b ÷ (€221b - €78b) (Based on the trailing twelve months to September 2020).
Therefore, Bayerische Motoren Werke has an ROCE of 4.3%. On its own that's a low return, but compared to the average of 2.1% generated by the Auto industry, it's much better.
Above you can see how the current ROCE for Bayerische Motoren Werke compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bayerische Motoren Werke.
What Can We Tell From Bayerische Motoren Werke's ROCE Trend?
In terms of Bayerische Motoren Werke's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.2%, but since then they've fallen to 4.3%. However it looks like Bayerische Motoren Werke might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Bayerische Motoren Werke's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we found 2 warning signs for Bayerische Motoren Werke (1 is significant) you should be aware of.
While Bayerische Motoren Werke isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. 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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