Returns At Weir Group (LON:WEIR) Are On The Way Up

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Weir Group (LON:WEIR) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Weir Group is:

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

0.12 = UK£361m ÷ (UK£3.9b - UK£902m) (Based on the trailing twelve months to June 2024).

So, Weir Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 14%.

View our latest analysis for Weir Group

Above you can see how the current ROCE for Weir Group 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 Weir Group for free.

What Can We Tell From Weir Group's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Weir Group. We found that the returns on capital employed over the last five years have risen by 68%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Weir Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Weir Group's ROCE

In a nutshell, we're pleased to see that Weir Group has been able to generate higher returns from less capital. And with a respectable 56% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for WEIR on our platform that is definitely worth checking out.

While Weir Group 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.