Returns At Deutsche Eigenheim Union (ETR:JZ6) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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. The formula for this calculation on Deutsche Eigenheim Union is:

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).

So, 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

Above you can see how the current ROCE for Deutsche Eigenheim Union 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 Deutsche Eigenheim Union here for free.

What Does the ROCE Trend For Deutsche Eigenheim Union Tell Us?

We're delighted to see that Deutsche Eigenheim Union is reaping rewards from its investments and has now broken into profitability. The company was generating losses two years ago, but has managed to turn it around and as we saw earlier is now earning 7.8%, which is always encouraging. While returns have increased, the amount of capital employed by Deutsche Eigenheim Union has remained flat over the period. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

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. 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. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take 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. And since the stock has fallen 46% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Deutsche Eigenheim Union (of which 1 shouldn't be ignored!) that you should know about.

While Deutsche Eigenheim Union 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.