Returns On Capital - An Important Metric For Washington H. Soul Pattinson (ASX:SOL)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Washington H. Soul Pattinson's (ASX:SOL) returns on capital, so let's have a look.

Understanding 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 Washington H. Soul Pattinson:

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

0.041 = AU$238m ÷ (AU$6.2b - AU$470m) (Based on the trailing twelve months to January 2020).

Thus, Washington H. Soul Pattinson has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.3%.

View our latest analysis for Washington H. Soul Pattinson

In the above chart we have a measured Washington H. Soul Pattinson'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 Washington H. Soul Pattinson Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 39%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Washington H. Soul Pattinson has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 65% return over the last five years. In light of that, we think it's worth looking further into this stock because if Washington H. Soul Pattinson can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Washington H. Soul Pattinson, we've discovered 3 warning signs that you should be aware of.

While Washington H. Soul Pattinson isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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