Slowing Rates Of Return At Alfa Laval (STO:ALFA) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Alfa Laval's (STO:ALFA) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Alfa Laval, this is the formula:

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

0.18 = kr9.8b ÷ (kr84b - kr29b) (Based on the trailing twelve months to June 2024).

So, Alfa Laval has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 15% it's much better.

See 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're interested, you can view the analysts predictions in our free analyst report for Alfa Laval .

What Does the ROCE Trend For Alfa Laval Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 35% more capital into its operations. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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

To sum it up, Alfa Laval has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 183% 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.

Alfa Laval does have some risks though, and we've spotted 1 warning sign for Alfa Laval that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.