Brenntag (ETR:BNR) shareholders will want the ROCE trajectory to continue

To find a multi-bagger stock, what underlying trends should we look for in a company? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we looked Brenntag (ETR:BNR) and its ROCE trend, we really liked what we saw.

Understanding return on capital employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for Brenntag:

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

0.14 = €995m ÷ (€11bn – €4.0bn) (Based on the last twelve months to March 2022).

Thereby, Brenntag has a ROCE of 14%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the commercial distributor industry average of 15%.

Check out our latest analysis for Brenntag

XTRA: BNR Return on Capital Employed August 1, 2022

Above, you can see how Brenntag’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What does Brenntag’s ROCE trend tell us?

Investors would be happy with what is happening at Brenntag. Figures show that over the past five years, returns generated on capital employed have increased significantly to 14%. Basically, the business earns more per dollar of invested capital and on top of that, 28% more capital is also utilized now. So we’re very inspired by what we’re seeing at Brenntag with its ability to reinvest capital profitably.

In conclusion…

In summary, it’s great to see that Brenntag can compound returns by constantly reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. Given that the stock has returned a solid 58% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. In light of that, we think it’s worth taking a closer look at this title, because if Brenntag can maintain these trends, he could have a bright future ahead of him.

Finally we found 2 warning signs for Brenntag (1 is concerning) that you should be aware of.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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