Under The Bonnet, Funkwerk's (FRA:FEW) Returns Look Impressive

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Funkwerk (FRA:FEW) looks great, so lets see what the trend can tell us.

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. The formula for this calculation on Funkwerk is:

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

0.20 = €16m ÷ (€86m - €6.8m) (Based on the trailing twelve months to June 2020).

So, Funkwerk has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Funkwerk

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'd like to look at how Funkwerk has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Funkwerk. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 112%. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 7.9%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Funkwerk has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Funkwerk's ROCE

To sum it up, Funkwerk has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 1,183% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Funkwerk can keep these trends up, it could have a bright future ahead.

Like most companies, Funkwerk does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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