Investors Shouldn't Overlook West Pharmaceutical Services' (NYSE:WST) Impressive Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. And in light of that, the trends we're seeing at West Pharmaceutical Services' (NYSE:WST) look very promising so lets take a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.23 = US$514m ÷ (US$2.7b - US$483m) (Based on the trailing twelve months to March 2021).

Therefore, West Pharmaceutical Services has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 8.7%.

Check out our latest analysis for West Pharmaceutical Services

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?

West Pharmaceutical Services is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 58% 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

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. And a remarkable 386% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

West Pharmaceutical Services does have some risks though, and we've spotted 1 warning sign for West Pharmaceutical Services that you might be interested in.

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