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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Spirax-Sarco Engineering (LON:SPX) looks attractive right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Spirax-Sarco Engineering:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = UK£280m ÷ (UK£1.7b – UK£370m) (Based on the trailing twelve months to June 2021).
So, Spirax-Sarco Engineering has an ROCE of 20%. In absolute terms that’s a great return and it’s even better than the Machinery industry average of 10%.
See our latest analysis for Spirax-Sarco Engineering
In the above chart we have measured Spirax-Sarco Engineering’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 report on analyst forecasts for the company.
What Does the ROCE Trend For Spirax-Sarco Engineering Tell Us?
It’s hard not to be impressed by Spirax-Sarco Engineering’s returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 117% in that time. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
Our Take On Spirax-Sarco Engineering’s ROCE
In summary, we’re delighted to see that Spirax-Sarco Engineering has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 288% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a separate note, we’ve found 1 warning sign for Spirax-Sarco Engineering you’ll probably want to know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
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