If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at AAON's (NASDAQ:AAON) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for AAON, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$239m ÷ (US$953m - US$125m) (Based on the trailing twelve months to March 2024).
So, AAON has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Building industry average of 17%.
View our latest analysis for AAON
Above you can see how the current ROCE for AAON 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 AAON for free.
How Are Returns Trending?
Investors would be pleased with what's happening at AAON. Over the last five years, returns on capital employed have risen substantially to 29%. The amount of capital employed has increased too, by 200%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
In summary, it's great to see that AAON can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 142% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
While AAON looks impressive, no company is worth an infinite price. The intrinsic value infographic for AAON helps visualize whether it is currently trading for a fair price.
AAON 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.
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About NasdaqGS:AAON
AAON
Engages in engineering, manufacturing, marketing, and selling air conditioning and heating equipment in the United States and Canada.
Solid track record with excellent balance sheet.
