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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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, we've noticed some promising trends at West Pharmaceutical Services (NYSE:WST) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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 West Pharmaceutical Services:

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

0.18 = US$420m ÷ (US$2.8b - US$503m) (Based on the trailing twelve months to December 2020).

So, West Pharmaceutical Services has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Medical Equipment industry.

View our latest analysis for West Pharmaceutical Services

roce
NYSE:WST Return on Capital Employed March 9th 2021

In the above chart we have measured West Pharmaceutical Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from West Pharmaceutical Services. The data shows that returns on capital have increased substantially over the last five years to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 66% more capital is being employed now too. 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 West Pharmaceutical Services' ROCE

To sum it up, West Pharmaceutical Services 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. 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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