Investors Could Be Concerned With Carlisle Companies' (NYSE:CSL) Returns On Capital

By
Simply Wall St
Published
July 01, 2021
NYSE:CSL
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Carlisle Companies (NYSE:CSL), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Carlisle Companies:

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

0.098 = US$501m ÷ (US$5.8b - US$660m) (Based on the trailing twelve months to March 2021).

Thus, Carlisle Companies has an ROCE of 9.8%. On its own, that's a low figure but it's around the 8.5% average generated by the Industrials industry.

View our latest analysis for Carlisle Companies

roce
NYSE:CSL Return on Capital Employed July 1st 2021

In the above chart we have measured Carlisle Companies' 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 Carlisle Companies here for free.

How Are Returns Trending?

In terms of Carlisle Companies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Carlisle Companies' ROCE

In summary, we're somewhat concerned by Carlisle Companies' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 94% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Carlisle Companies does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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