Spirax-Sarco Engineering (LON:SPX) Knows How To Allocate Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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. 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)

0.20 = 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 our latest analysis for Spirax-Sarco Engineering

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, you can check out the forecasts from the analysts covering Spirax-Sarco Engineering here for free.

What Can We Tell From Spirax-Sarco Engineering's ROCE Trend?

Spirax-Sarco Engineering deserves to be commended in regards to it's returns. The company has employed 92% more capital in the last five years, and the returns on that capital have remained stable at 20%. 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 101% 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.

Spirax-Sarco Engineering 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. 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.