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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 ran our eye over BELIMO Holding's (VTX:BEAN) trend of ROCE, we really liked what we saw.
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. To calculate this metric for BELIMO Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CHF107m ÷ (CHF583m - CHF78m) (Based on the trailing twelve months to December 2020).
Thus, BELIMO Holding has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Building industry average of 18% it's pretty much on par.
Above you can see how the current ROCE for BELIMO Holding 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 report for BELIMO Holding.
What Can We Tell From BELIMO Holding's ROCE Trend?
It's hard not to be impressed by BELIMO Holding's returns on capital. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 38% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If BELIMO Holding can keep this up, we'd be very optimistic about its future.
The Bottom Line On BELIMO Holding's ROCE
In summary, we're delighted to see that BELIMO Holding 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 242% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
One more thing, we've spotted 1 warning sign facing BELIMO Holding that you might find interesting.
BELIMO Holding is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. 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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