Some Investors May Be Worried About Fresenius SE KGaA's (ETR:FRE) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Fresenius SE KGaA (ETR:FRE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Fresenius SE KGaA, this is the formula:

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

0.054 = €3.3b ÷ (€77b - €16b) (Based on the trailing twelve months to March 2023).

Therefore, Fresenius SE KGaA has an ROCE of 5.4%. On its own, that's a low figure but it's around the 5.5% average generated by the Healthcare industry.

View our latest analysis for Fresenius SE KGaA

Above you can see how the current ROCE for Fresenius SE KGaA 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Fresenius SE KGaA Tell Us?

On the surface, the trend of ROCE at Fresenius SE KGaA doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Fresenius SE KGaA's ROCE

Bringing it all together, while we're somewhat encouraged by Fresenius SE KGaA's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 54% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Fresenius SE KGaA has the makings of a multi-bagger.

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

While Fresenius SE KGaA 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.