Spirax-Sarco Engineering (LON:SPX) Is Reinvesting To Multiply In Value

Simply Wall St
May 10, 2022
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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 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. 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)

0.21 = UK£318m ÷ (UK£1.9b - UK£382m) (Based on the trailing twelve months to December 2021).

Thus, Spirax-Sarco Engineering has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10%.

See our latest analysis for Spirax-Sarco Engineering

LSE:SPX Return on Capital Employed May 10th 2022

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.

So How Is Spirax-Sarco Engineering's ROCE Trending?

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 21% and the business has deployed 110% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

Our Take On Spirax-Sarco Engineering's ROCE

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 123% return they've received 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.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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