Yahoo Finance KHD Humboldt Wedag International (ETR:KWG) Is Experiencing Growth In Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in KHD Humboldt Wedag International's (ETR:KWG) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 KHD Humboldt Wedag International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = €2.5m ÷ (€228m - €106m) (Based on the trailing twelve months to June 2023).
Therefore, KHD Humboldt Wedag International has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.
View our latest analysis for KHD Humboldt Wedag International
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 KHD Humboldt Wedag International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is KHD Humboldt Wedag International's ROCE Trending?
We're delighted to see that KHD Humboldt Wedag International is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 28% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
On a side note, KHD Humboldt Wedag International's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In the end, KHD Humboldt Wedag International has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you'd like to know more about KHD Humboldt Wedag International, we've spotted 3 warning signs, and 2 of them are a bit concerning.
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.
