Investors Shouldn't Overlook The Favourable Returns On Capital At Spirax-Sarco Engineering (LON:SPX)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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£335m ÷ (UK£2.1b - UK£362m) (Based on the trailing twelve months to June 2022).

Therefore, 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 11%.

Check out the opportunities and risks within the GB Machinery industry.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Spirax-Sarco Engineering.

The Trend Of ROCE

It's hard not to be impressed by Spirax-Sarco Engineering's returns on capital. Over the past five years, ROCE has remained relatively flat at around 20% and the business has deployed 92% more capital into its operations. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Spirax-Sarco Engineering can keep this up, we'd be very optimistic about its future.

The Key Takeaway

Spirax-Sarco Engineering has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 110% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

While Spirax-Sarco Engineering looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SPX is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.