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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Alfa Laval (STO:ALFA) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding 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 Alfa Laval is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = kr10b ÷ (kr84b - kr29b) (Based on the trailing twelve months to September 2024).
Therefore, Alfa Laval has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 15% generated by the Machinery industry.
View our latest analysis for Alfa Laval
In the above chart we have measured Alfa Laval'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 Alfa Laval for free.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 31% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Alfa Laval has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
The main thing to remember is that Alfa Laval has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 114% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you're still interested in Alfa Laval it's worth checking out our FREE intrinsic value approximation for ALFA to see if it's trading at an attractive price in other respects.
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About OM:ALFA
Alfa Laval
Provides heat transfer, separation, and fluid handling products and solutions worldwide.
Flawless balance sheet with solid track record.
