The Returns On Capital At Atlas Copco (STO:ATCO A) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Looking at Atlas Copco (STO:ATCO A), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Atlas Copco:

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

0.28 = kr35b ÷ (kr192b - kr67b) (Based on the trailing twelve months to June 2023).

Thus, Atlas Copco has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Machinery industry average of 15%.

View our latest analysis for Atlas Copco

Above you can see how the current ROCE for Atlas Copco 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 Atlas Copco here for free.

The Trend Of ROCE

In terms of Atlas Copco's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 37%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Atlas Copco's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Atlas Copco is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 153% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Atlas Copco could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

Atlas Copco is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.