ElringKlinger (ETR:ZIL2) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at ElringKlinger (ETR:ZIL2) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for ElringKlinger:

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

0.08 = €119m ÷ (€2.1b - €575m) (Based on the trailing twelve months to September 2021).

Therefore, ElringKlinger has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.

Check out our latest analysis for ElringKlinger

Above you can see how the current ROCE for ElringKlinger compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is ElringKlinger's ROCE Trending?

Over the past five years, ElringKlinger's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if ElringKlinger doesn't end up being a multi-bagger in a few years time. This probably explains why ElringKlinger is paying out 31% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Key Takeaway

In a nutshell, ElringKlinger has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 11% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think ElringKlinger has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for ElringKlinger that we think you should be aware of.

While ElringKlinger 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.