Returns Are Gaining Momentum At Renishaw (LON:RSW)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Renishaw's (LON:RSW) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Renishaw:

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

0.12 = UK£115m ÷ (UK£1.0b - UK£103m) (Based on the trailing twelve months to December 2024).

Thus, Renishaw has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electronic industry.

See our latest analysis for Renishaw

Above you can see how the current ROCE for Renishaw 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 Renishaw for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Renishaw. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. So we're very much inspired by what we're seeing at Renishaw thanks to its ability to profitably reinvest capital.

The Bottom Line On Renishaw's ROCE

To sum it up, Renishaw has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 1 warning sign facing Renishaw that you might find interesting.

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.