KWS SAAT SE KGaA (ETR:KWS) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, KWS SAAT SE KGaA (ETR:KWS) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for KWS SAAT SE KGaA, this is the formula:

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

0.13 = €235m ÷ (€3.0b - €1.1b) (Based on the trailing twelve months to September 2023).

So, KWS SAAT SE KGaA has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Food industry.

Check out our latest analysis for KWS SAAT SE KGaA

In the above chart we have measured KWS SAAT SE KGaA'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 KWS SAAT SE KGaA here for free.

What The Trend Of ROCE Can Tell Us

KWS SAAT SE KGaA is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 58%. So we're very much inspired by what we're seeing at KWS SAAT SE KGaA thanks to its ability to profitably reinvest capital.

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. Essentially the business now has suppliers or short-term creditors funding about 38% 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.

Our Take On KWS SAAT SE KGaA's ROCE

To sum it up, KWS SAAT SE KGaA has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 2 warning signs for KWS SAAT SE KGaA (1 is potentially serious) you should be aware of.

While KWS SAAT SE KGaA 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.