Returns Are Gaining Momentum At Deutsche Eigenheim Union (ETR:JZ6)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Deutsche Eigenheim Union (ETR:JZ6) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Deutsche Eigenheim Union:

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

0.078 = €3.0m ÷ (€52m - €14m) (Based on the trailing twelve months to June 2023).

Thus, Deutsche Eigenheim Union has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 6.3% generated by the Consumer Durables industry, it's much better.

Check out our latest analysis for Deutsche Eigenheim Union

In the above chart we have measured Deutsche Eigenheim Union's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Deutsche Eigenheim Union here for free.

What The Trend Of ROCE Can Tell Us

Deutsche Eigenheim Union has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.8% on its capital, because two years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 27% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

The Bottom Line On Deutsche Eigenheim Union's ROCE

In summary, we're delighted to see that Deutsche Eigenheim Union has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 65% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 2 warning signs with Deutsche Eigenheim Union and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.