We Like These Underlying Return On Capital Trends At ESAB (NYSE:ESAB)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at ESAB (NYSE:ESAB) so let's look a bit deeper.

Understanding 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. The formula for this calculation on ESAB is:

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

0.14 = US$466m ÷ (US$4.1b - US$637m) (Based on the trailing twelve months to September 2024).

Thus, ESAB has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 13%.

See our latest analysis for ESAB

In the above chart we have measured ESAB's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for ESAB .

What Does the ROCE Trend For ESAB Tell Us?

ESAB's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 68% over the last four years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On ESAB's ROCE

In summary, we're delighted to see that ESAB has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 63% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. 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.

If you want to continue researching ESAB, you might be interested to know about the 1 warning sign that our analysis has discovered.

While ESAB may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.