Returns On Capital At Edel SE KGaA (ETR:EDL) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Edel SE KGaA (ETR:EDL) 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 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. Analysts use this formula to calculate it for Edel SE KGaA:

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

0.043 = €6.3m ÷ (€175m - €28m) (Based on the trailing twelve months to March 2020).

Thus, Edel SE KGaA has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 13%.

View our latest analysis for Edel SE KGaA

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Edel SE KGaA's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Edel SE KGaA's ROCE Trend?

When we looked at the ROCE trend at Edel SE KGaA, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.3% from 6.7% 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Edel SE KGaA's ROCE

To conclude, we've found that Edel SE KGaA is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 0.08% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Edel SE KGaA (of which 1 makes us a bit uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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