Returns On Capital At KWS SAAT SE KGaA (ETR:KWS) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think KWS SAAT SE KGaA (ETR:KWS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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)

0.073 = €138m ÷ (€2.4b - €484m) (Based on the trailing twelve months to June 2021).

Therefore, KWS SAAT SE KGaA has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Food industry average of 8.3%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for KWS SAAT SE KGaA.

So How Is KWS SAAT SE KGaA's ROCE Trending?

There are better returns on capital out there than what we're seeing at KWS SAAT SE KGaA. The company has consistently earned 7.3% for the last five years, and the capital employed within the business has risen 63% in that time. 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 Bottom Line

As we've seen above, KWS SAAT SE KGaA's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 34% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing KWS SAAT SE KGaA that you might find interesting.

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.

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.

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