Stelrad Group (LON:SRAD) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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, we've noticed some promising trends at Stelrad Group (LON:SRAD) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Stelrad Group is:

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

0.17 = UK£27m ÷ (UK£262m - UK£103m) (Based on the trailing twelve months to December 2022).

Therefore, Stelrad Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Consumer Durables industry.

Check out our latest analysis for Stelrad Group

Above you can see how the current ROCE for Stelrad Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Stelrad Group.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Stelrad Group. The data shows that returns on capital have increased substantially over the last five years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 91% more capital is being employed now too. So we're very much inspired by what we're seeing at Stelrad Group thanks to its ability to profitably reinvest capital.

Our Take On Stelrad Group's ROCE

In summary, it's great to see that Stelrad Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 38% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Stelrad Group, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.