There Are Reasons To Feel Uneasy About Knorr-Bremse's (ETR:KBX) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Knorr-Bremse (ETR:KBX), it didn't seem to tick all of these boxes.

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. To calculate this metric for Knorr-Bremse, this is the formula:

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

0.18 = €826m ÷ (€7.3b - €2.7b) (Based on the trailing twelve months to March 2022).

Thus, Knorr-Bremse has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.6% it's much better.

View our latest analysis for Knorr-Bremse

Above you can see how the current ROCE for Knorr-Bremse 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 Knorr-Bremse here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Knorr-Bremse doesn't inspire confidence. To be more specific, ROCE has fallen from 29% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Knorr-Bremse's ROCE

Bringing it all together, while we're somewhat encouraged by Knorr-Bremse's reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Knorr-Bremse does come with some risks, and we've found 2 warning signs that you should be aware of.

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.