Did you know there are some financial metrics that can provide clues of a potential 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. 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 Parker-Hannifin (NYSE:PH) so let's look a bit deeper.
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 Parker-Hannifin, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$4.0b ÷ (US$29b - US$7.3b) (Based on the trailing twelve months to June 2024).
So, Parker-Hannifin has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 13% it's much better.
Check out our latest analysis for Parker-Hannifin
Above you can see how the current ROCE for Parker-Hannifin 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 Parker-Hannifin for free.
What Can We Tell From Parker-Hannifin's ROCE Trend?
We like the trends that we're seeing from Parker-Hannifin. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 52%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Parker-Hannifin's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Parker-Hannifin has. And a remarkable 239% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
One more thing to note, we've identified 2 warning signs with Parker-Hannifin and understanding them should be part of your investment process.
While Parker-Hannifin 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.
About NYSE:PH
Parker-Hannifin
Manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide.
Outstanding track record, good value and pays a dividend.
