KHD Humboldt Wedag International (ETR:KWG) Might Have The Makings Of 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at KHD Humboldt Wedag International (ETR:KWG) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for KHD Humboldt Wedag International, this is the formula:

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

0.0045 = €543k ÷ (€238m - €117m) (Based on the trailing twelve months to June 2024).

Therefore, KHD Humboldt Wedag International has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.9%.

Check out our latest analysis for KHD Humboldt Wedag International

Historical performance is a great place to start when researching a stock so above you can see the gauge for KHD Humboldt Wedag International's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of KHD Humboldt Wedag International.

What Can We Tell From KHD Humboldt Wedag International's ROCE Trend?

Like most people, we're pleased that KHD Humboldt Wedag International is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.4% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 26%. KHD Humboldt Wedag International could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 49% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On KHD Humboldt Wedag International's ROCE

From what we've seen above, KHD Humboldt Wedag International has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 60% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 4 warning signs facing KHD Humboldt Wedag International that you might find interesting.

While KHD Humboldt Wedag International 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. 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.