Shareholders Are Optimistic That Allegion (NYSE:ALLE) Will Multiply In Value

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of Allegion (NYSE:ALLE) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Allegion:

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

0.20 = US$762m ÷ (US$4.8b - US$1.0b) (Based on the trailing twelve months to June 2024).

Thus, Allegion has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Building industry average of 16%.

Check out our latest analysis for Allegion

In the above chart we have measured Allegion'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 Allegion for free.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Allegion. The company has employed 61% more capital in the last five years, and the returns on that capital have remained stable at 20%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

The Key Takeaway

In short, we'd argue Allegion has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. In light of this, the stock has only gained 40% over the last five years for shareholders who have owned the stock in this period. So to determine if Allegion is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

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

Allegion 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.