Here's What To Make Of KWS SAAT SE KGaA's (ETR:KWS) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at KWS SAAT SE KGaA (ETR:KWS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on KWS SAAT SE KGaA is:

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

0.077 = €147m ÷ (€2.5b - €607m) (Based on the trailing twelve months to September 2021).

Thus, KWS SAAT SE KGaA has an ROCE of 7.7%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

Check out our latest analysis for KWS SAAT SE KGaA

Above you can see how the current ROCE for KWS SAAT SE KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for KWS SAAT SE KGaA.

What Does the ROCE Trend For KWS SAAT SE KGaA Tell Us?

In terms of KWS SAAT SE KGaA's historical ROCE trend, it doesn't exactly demand attention. The company has employed 69% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

Long story short, while KWS SAAT SE KGaA has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 1 warning sign for KWS SAAT SE KGaA you'll probably want to know about.

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.