Slowing Rates Of Return At ESCO Technologies (NYSE:ESE) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at ESCO Technologies (NYSE:ESE) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ESCO Technologies:

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

0.089 = US$131m ÷ (US$1.8b - US$305m) (Based on the trailing twelve months to December 2023).

So, ESCO Technologies has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

Check out our latest analysis for ESCO Technologies

Above you can see how the current ROCE for ESCO Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ESCO Technologies for free.

So How Is ESCO Technologies' ROCE Trending?

The returns on capital haven't changed much for ESCO Technologies in recent years. The company has consistently earned 8.9% for the last five years, and the capital employed within the business has risen 37% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On ESCO Technologies' ROCE

In conclusion, ESCO Technologies has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

ESCO Technologies could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ESE on our platform quite valuable.

While ESCO Technologies isn't earning the highest return, check out this free list of companies that are 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.