The Returns At ESCO Technologies (NYSE:ESE) Aren't Growing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at ESCO Technologies (NYSE:ESE), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for ESCO Technologies, this is the formula:

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

0.092 = US$138m ÷ (US$1.8b - US$289m) (Based on the trailing twelve months to March 2024).

Therefore, ESCO Technologies has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

See our latest analysis for ESCO Technologies

In the above chart we have measured ESCO Technologies' 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 ESCO Technologies .

So How Is ESCO Technologies' ROCE Trending?

There are better returns on capital out there than what we're seeing at ESCO Technologies. The company has consistently earned 9.2% 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.

What We Can Learn From ESCO Technologies' ROCE

In summary, ESCO Technologies has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 35% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com