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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Siemens Energy (ETR:ENR) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Siemens Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0097 = €174m ÷ (€55b - €37b) (Based on the trailing twelve months to December 2024).
Thus, Siemens Energy has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.
See our latest analysis for Siemens Energy
In the above chart we have measured Siemens Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Siemens Energy .
So How Is Siemens Energy's ROCE Trending?
Shareholders will be relieved that Siemens Energy has broken into profitability. The company now earns 1.0% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Siemens Energy has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 67% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Siemens Energy's ROCE
As discussed above, Siemens Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 195% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.