Returns At Spirax-Sarco Engineering (LON:SPX) Appear To Be Weighed Down

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. That's why when we briefly looked at Spirax-Sarco Engineering's (LON:SPX) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Spirax-Sarco Engineering, this is the formula:

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

0.16 = UK£340m ÷ (UK£2.7b - UK£586m) (Based on the trailing twelve months to June 2023).

Therefore, Spirax-Sarco Engineering has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.

View our latest analysis for Spirax-Sarco Engineering

Above you can see how the current ROCE for Spirax-Sarco Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Spirax-Sarco Engineering here for free.

What Does the ROCE Trend For Spirax-Sarco Engineering Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 63% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Spirax-Sarco Engineering has consistently earned this amount. 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.

The Bottom Line On Spirax-Sarco Engineering's ROCE

To sum it up, Spirax-Sarco Engineering has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 57% return if they held over the last five years. 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 Spirax-Sarco Engineering that you might find interesting.

While Spirax-Sarco Engineering 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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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.