Returns On Capital Are Showing Encouraging Signs At Eigenheim Union 1898 Beteiligungs (ETR:JZ6)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Eigenheim Union 1898 Beteiligungs (ETR:JZ6) looks quite promising in regards to its trends of return on capital.

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

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 Eigenheim Union 1898 Beteiligungs 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).

Therefore, Eigenheim Union 1898 Beteiligungs 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 Eigenheim Union 1898 Beteiligungs

Above you can see how the current ROCE for Eigenheim Union 1898 Beteiligungs compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Eigenheim Union 1898 Beteiligungs .

How Are Returns Trending?

We're delighted to see that Eigenheim Union 1898 Beteiligungs is reaping rewards from its investments and has now broken into profitability. 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. Essentially the business now has suppliers or short-term creditors funding about 27% of its operations, which isn't ideal. 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.

The Bottom Line

To sum it up, Eigenheim Union 1898 Beteiligungs is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 42% 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: We've identified 3 warning signs with Eigenheim Union 1898 Beteiligungs (at least 2 which are significant) , and understanding them would certainly be useful.

While Eigenheim Union 1898 Beteiligungs may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.