There's Been No Shortage Of Growth Recently For Pittler Maschinenfabrik's (FRA:PIT) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Pittler Maschinenfabrik's (FRA:PIT) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Pittler Maschinenfabrik, this is the formula:

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

0.09 = €1.1m ÷ (€18m - €6.0m) (Based on the trailing twelve months to December 2021).

So, Pittler Maschinenfabrik has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.6%.

Check out our latest analysis for Pittler Maschinenfabrik

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

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.0%. The amount of capital employed has increased too, by 55%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 34% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Pittler Maschinenfabrik's ROCE

All in all, it's terrific to see that Pittler Maschinenfabrik is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 4 warning signs for Pittler Maschinenfabrik (3 make us uncomfortable) 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.