Modine Manufacturing's (NYSE:MOD) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Modine Manufacturing's (NYSE:MOD) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Modine Manufacturing:

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

0.17 = US$193m ÷ (US$1.6b - US$507m) (Based on the trailing twelve months to June 2023).

Therefore, Modine Manufacturing has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 12% it's much better.

View our latest analysis for Modine Manufacturing

In the above chart we have measured Modine Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Modine Manufacturing.

What Does the ROCE Trend For Modine Manufacturing Tell Us?

Modine Manufacturing's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 52% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Modine Manufacturing's ROCE

To sum it up, Modine Manufacturing is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 168% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Modine Manufacturing can keep these trends up, it could have a bright future ahead.

Modine Manufacturing does have some risks, we noticed 4 warning signs (and 1 which is potentially serious) we think you should know about.

While Modine Manufacturing may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.