What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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, the ROCE of Pentair (NYSE:PNR) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Pentair:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$787m ÷ (US$6.5b - US$1.1b) (Based on the trailing twelve months to June 2023).
Therefore, Pentair has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 11% it's much better.
View our latest analysis for Pentair
Above you can see how the current ROCE for Pentair compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has employed 76% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
To sum it up, Pentair has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 72% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 1 warning sign for Pentair that we think you should be aware of.
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. 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:PNR
Pentair
Provides various water solutions in the United States, Western Europe, China, Eastern Europe, Latin America, the Middle East, Southeast Asia, Australia, Canada, and Japan.
Solid track record with adequate balance sheet.