Stock Analysis

Why You Should Care About Allegion's (NYSE:ALLE) Strong Returns On Capital

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NYSE:ALLE
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Allegion's (NYSE:ALLE) trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Allegion, this is the formula:

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

0.22 = US$529m ÷ (US$3.0b - US$582m) (Based on the trailing twelve months to March 2022).

So, Allegion has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Building industry average of 13%.

Check out our latest analysis for Allegion

roce
NYSE:ALLE Return on Capital Employed April 29th 2022

Above you can see how the current ROCE for Allegion compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Allegion deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 36% more capital into its operations. 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.

In Conclusion...

In summary, we're delighted to see that Allegion has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 62% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Allegion that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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