Simpson Manufacturing (NYSE:SSD) Is Very Good At Capital Allocation

By
Simply Wall St
Published
March 22, 2022
NYSE:SSD
Source: Shutterstock

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Simpson Manufacturing (NYSE:SSD) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Simpson Manufacturing, this is the formula:

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

0.30 = US$367m ÷ (US$1.5b - US$245m) (Based on the trailing twelve months to December 2021).

Thus, Simpson Manufacturing has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Simpson Manufacturing

roce
NYSE:SSD Return on Capital Employed March 22nd 2022

In the above chart we have measured Simpson Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Simpson Manufacturing here for free.

So How Is Simpson Manufacturing's ROCE Trending?

The trends we've noticed at Simpson Manufacturing are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. 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 Key Takeaway

To sum it up, Simpson Manufacturing has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Simpson Manufacturing we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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