If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Gentherm (NASDAQ:THRM) looks decent, right now, so lets see what the trend of returns can tell us.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Gentherm:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$102m ÷ (US$1.2b - US$325m) (Based on the trailing twelve months to December 2023).
Thus, Gentherm has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
Above you can see how the current ROCE for Gentherm 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 analyst report for Gentherm .
The Trend Of ROCE
While the returns on capital are good, they haven't moved much. The company has employed 45% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Gentherm has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Gentherm's ROCE
In the end, Gentherm has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 23% over the last five years for shareholders who have owned the stock in this period. So to determine if Gentherm is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
On a separate note, we've found 1 warning sign for Gentherm you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.