Here's What To Make Of Westinghouse Air Brake Technologies' (NYSE:WAB) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Westinghouse Air Brake Technologies (NYSE:WAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Westinghouse Air Brake Technologies:

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

0.086 = US$1.3b ÷ (US$19b - US$3.9b) (Based on the trailing twelve months to September 2023).

Therefore, Westinghouse Air Brake Technologies has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

See our latest analysis for Westinghouse Air Brake Technologies

Above you can see how the current ROCE for Westinghouse Air Brake Technologies 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.

What Does the ROCE Trend For Westinghouse Air Brake Technologies Tell Us?

The returns on capital haven't changed much for Westinghouse Air Brake Technologies in recent years. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 112% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

As we've seen above, Westinghouse Air Brake Technologies' returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

While Westinghouse Air Brake Technologies doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Westinghouse Air Brake 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.