To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Spielvereinigung Unterhaching Fußball GmbH KGaA's (ETR:S6P) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Spielvereinigung Unterhaching Fußball GmbH KGaA, this is the formula:

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

0.18 = €1.8m ÷ (€12m - €1.7m) (Based on the trailing twelve months to June 2022).

Therefore, Spielvereinigung Unterhaching Fußball GmbH KGaA has an ROCE of 18%. By itself that's a normal return on capital and it's in line with the industry's average returns of 18%.

See our latest analysis for Spielvereinigung Unterhaching Fußball GmbH KGaA

Historical performance is a great place to start when researching a stock so above you can see the gauge for Spielvereinigung Unterhaching Fußball GmbH KGaA's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Spielvereinigung Unterhaching Fußball GmbH KGaA, check out these free graphs here.

The Trend Of ROCE

The fact that Spielvereinigung Unterhaching Fußball GmbH KGaA is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 18% which is a sight for sore eyes. Not only that, but the company is utilizing 374% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To the delight of most shareholders, Spielvereinigung Unterhaching Fußball GmbH KGaA has now broken into profitability. Given the stock has declined 54% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 2 warning signs we've spotted with Spielvereinigung Unterhaching Fußball GmbH KGaA (including 1 which is 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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