Stock Analysis

Can West Pharmaceutical Services (NYSE:WST) Continue To Grow Its Returns On Capital?

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NYSE:WST
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in West Pharmaceutical Services' (NYSE:WST) returns on capital, so let's have a look.

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

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. To calculate this metric for West Pharmaceutical Services, this is the formula:

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

0.17 = US$369m ÷ (US$2.6b - US$448m) (Based on the trailing twelve months to September 2020).

Therefore, West Pharmaceutical Services has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Medical Equipment industry.

View our latest analysis for West Pharmaceutical Services

roce
NYSE:WST Return on Capital Employed December 1st 2020

Above you can see how the current ROCE for West Pharmaceutical Services 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 West Pharmaceutical Services here for free.

What Does the ROCE Trend For West Pharmaceutical Services Tell Us?

The trends we've noticed at West Pharmaceutical Services are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The amount of capital employed has increased too, by 56%. So we're very much inspired by what we're seeing at West Pharmaceutical Services thanks to its ability to profitably reinvest capital.

The Bottom Line On West Pharmaceutical Services' ROCE

All in all, it's terrific to see that West Pharmaceutical Services is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 355% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if West Pharmaceutical Services can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

While West Pharmaceutical Services 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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What are the risks and opportunities for West Pharmaceutical Services?

West Pharmaceutical Services, Inc. designs, manufactures, and sells containment and delivery systems for injectable drugs and healthcare products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

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Rewards

  • Earnings are forecast to grow 8.79% per year

  • Earnings have grown 34.1% per year over the past 5 years

Risks

No risks detected for WST from our risks checks.

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West Pharmaceutical Services

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