If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Eckert & Ziegler Strahlen- und Medizintechnik (ETR:EUZ) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Eckert & Ziegler Strahlen- und Medizintechnik:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = €40m ÷ (€420m - €68m) (Based on the trailing twelve months to March 2023).
Therefore, Eckert & Ziegler Strahlen- und Medizintechnik has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Medical Equipment industry.
Above you can see how the current ROCE for Eckert & Ziegler Strahlen- und Medizintechnik compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Eckert & Ziegler Strahlen- und Medizintechnik.
The Trend Of ROCE
The trends we've noticed at Eckert & Ziegler Strahlen- und Medizintechnik are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 90%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
To sum it up, Eckert & Ziegler Strahlen- und Medizintechnik has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Eckert & Ziegler Strahlen- und Medizintechnik looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether EUZ is currently trading for a fair price.
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.
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