Investors Met With Slowing Returns on Capital At Electrocomponents (LON:ECM)

By
Simply Wall St
Published
January 06, 2022
LSE:RS1
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Electrocomponents' (LON:ECM) ROCE trend, we were pretty happy with 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. The formula for this calculation on Electrocomponents is:

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

0.19 = UK£250m ÷ (UK£1.9b - UK£643m) (Based on the trailing twelve months to September 2021).

Therefore, Electrocomponents has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 14% generated by the Trade Distributors industry.

View our latest analysis for Electrocomponents

roce
LSE:ECM Return on Capital Employed January 6th 2022

Above you can see how the current ROCE for Electrocomponents compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 98% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Electrocomponents' ROCE

The main thing to remember is that Electrocomponents has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 172% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Electrocomponents doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Electrocomponents may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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