Capital Allocation Trends At Fresenius Medical Care KGaA (ETR:FME) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Fresenius Medical Care KGaA (ETR:FME), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Fresenius Medical Care KGaA, this is the formula:

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

0.052 = €1.5b ÷ (€35b - €6.6b) (Based on the trailing twelve months to June 2023).

So, Fresenius Medical Care KGaA has an ROCE of 5.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.2%.

See our latest analysis for Fresenius Medical Care KGaA

Above you can see how the current ROCE for Fresenius Medical Care KGaA 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 Fresenius Medical Care KGaA here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Fresenius Medical Care KGaA doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Fresenius Medical Care KGaA's ROCE

In summary, Fresenius Medical Care KGaA is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 2 warning signs for Fresenius Medical Care KGaA that we think you should be aware of.

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.