Stantec (TSE:STN) Is Experiencing Growth In Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at Stantec (TSE:STN) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Stantec is:

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

0.12 = CA$612m ÷ (CA$6.9b - CA$1.9b) (Based on the trailing twelve months to September 2024).

Therefore, Stantec has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

See our latest analysis for Stantec

Above you can see how the current ROCE for Stantec 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 Stantec .

How Are Returns Trending?

The trends we've noticed at Stantec are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. 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 38%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Stantec's ROCE

All in all, it's terrific to see that Stantec is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 203% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Stantec can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Stantec that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.