Shareholders Would Enjoy A Repeat Of A. O. Smith's (NYSE:AOS) Recent Growth In Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. And in light of that, the trends we're seeing at A. O. Smith's (NYSE:AOS) 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. The formula for this calculation on A. O. Smith is:

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

0.32 = US$730m ÷ (US$3.2b - US$896m) (Based on the trailing twelve months to September 2023).

So, A. O. Smith has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

Check out our latest analysis for A. O. Smith

In the above chart we have measured A. O. Smith'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 A. O. Smith here for free.

How Are Returns Trending?

A. O. Smith's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 32% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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.

What We Can Learn From A. O. Smith's ROCE

To bring it all together, A. O. Smith has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if A. O. Smith can keep these trends up, it could have a bright future ahead.

A. O. Smith does have some risks though, and we've spotted 2 warning signs for A. O. Smith that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.