Stock Analysis

We Like These Underlying Return On Capital Trends At Brüder Mannesmann (FRA:BMM)

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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Brüder Mannesmann (FRA:BMM) and its trend of ROCE, we really liked what we saw.

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 Brüder Mannesmann, this is the formula:

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

0.11 = €3.3m ÷ (€42m - €12m) (Based on the trailing twelve months to December 2021).

Thus, Brüder Mannesmann has an ROCE of 11%. In isolation, that's a pretty standard return but against the Retail Distributors industry average of 16%, it's not as good.

View our latest analysis for Brüder Mannesmann

DB:BMM Return on Capital Employed March 15th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Brüder Mannesmann's ROCE against it's prior returns. If you'd like to look at how Brüder Mannesmann has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Brüder Mannesmann's ROCE Trending?

The trends we've noticed at Brüder Mannesmann are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 11%. The amount of capital employed has increased too, by 31%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that Brüder Mannesmann can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 96% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Brüder Mannesmann can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 6 warning signs with Brüder Mannesmann (at least 4 which are potentially serious) , and understanding these would certainly be useful.

While Brüder Mannesmann 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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