There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of West Pharmaceutical Services (NYSE:WST) we really liked what we saw.
What is Return On Capital Employed (ROCE)?
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 West Pharmaceutical Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$618m ÷ (US$2.9b - US$473m) (Based on the trailing twelve months to June 2021).
Therefore, West Pharmaceutical Services has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 8.8%.
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'd like, you can check out the forecasts from the analysts covering West Pharmaceutical Services here for free.
So How Is West Pharmaceutical Services' ROCE Trending?
Investors would be pleased with what's happening at West Pharmaceutical Services. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 68%. So we're very much inspired by what we're seeing at West Pharmaceutical Services thanks to its ability to profitably reinvest capital.
What We Can Learn From 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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.
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